What's next for markets after the Fed's 4th consecutive interest rate hike

MarketWatch spoke to several market gurus about what investors should watch out for and what all of this could mean for their portfolios.

Inflation, jobs data could force Fed to keep rates ‘higher for longer’

The Fed may be eyeing another 50 basis point rate hike at its December meeting, but any signs that inflation is not trending toward the central bank’s target could still send stocks tumbling and hurting. drive up Treasury yields, market strategists said.

Indeed, stocks initially rallied after Wednesday’s Fed policy statement signaled that a slower pace of rate hikes was in sight. But the indices ended the day sharply lower after Chairman Jerome Powell, at his press conference, said it was premature to “pause” rate hikes and that the terminal interest rate – or peak — was likely to be higher than policymakers had expected in September.

Rex nut: How Powell strayed from the Fed’s dovish message and sent markets tumbling

Although headline inflation has eased from the fastest pace in more than 40 years, core prices continue to accelerate at an uncomfortable pace and wage growth remains a “mixed bag,” Powell said.

“A lot of what the Fed ultimately does will depend on what happens with inflation,” said Jack Ablin, founding partner and chief investment officer at Cresset Capital.

The consumer price index for October is due out on November 10, followed by the personal consumption expenditure index, the Fed’s favorite barometer of inflationary pressures, on December 1.

But there’s still a lot to learn about inflation in the October jobs report due out on Friday, including its reading on average hourly earnings.

“I think the number of payrolls is certainly important, and it all comes down to what that means for inflation,” Ablin said.

Conclusion: Any further indication that the Fed will need to keep interest rates “higher longer” to fight inflation could exacerbate the weakness in stock and bond prices, which move inversely to yields, seen so far. now this year.

“Accelerating inflation sets a high bar for the Fed to end the current rate-hike cycle and an even higher bar for beginning to cut rates,” said Comerica chief economist Bill Adams. Bank.

The mid-terms and the return of the impasse

Even if Democrats manage to hold on to both houses of Congress, investors will likely breathe a sigh of relief once Tuesday’s U.S. midterm elections are over.

“We frequently see stocks rally after the election, regardless of the outcome,” said Callie Cox, US investment analyst at eToro.

See: What Midterms Mean for the Stock Market’s ‘Best Six Months’ as the Favorable Calendar Period Sets in

Some investors think Republicans taking over the House or Senate could be bullish on stocks, said Octavio Marenzi, CEO of market-focused management consulting firm Opimas.

According to Marenzi, a divided Congress would likely lead to more gridlock, which would mean less inherently inflationary budget spending.

“Markets could be in favor of a Republican takeover of at least one of the houses [of Congress],” he said.

The gains remain significant

Corporate earnings growth has held up surprisingly well so far this year despite the drumbeat of guidance cuts and worrying rhetoric from corporate executives, eToro’s Cox said.

But the third-quarter earnings season isn’t over yet, which may mean more nasty surprises, like what investors saw when Alphabet Inc. GOOG,
-3.79%,
Meta Platforms Inc. META,
-4.89%
and Amazon.com Inc. AMZN,
-4.82%
income reported last week.

Lily: Amazon, Meta and Alphabet Now Demand ‘Perfection’, Analyst Says in Big Tech’s ‘Autopsy’

Investors are still awaiting earnings from more than 150 S&P 500 companies, according to FactSet. Beyond that, there’s also a risk that earnings forecast cuts will weigh on stock prices, market strategists said.

Michael Wilson, chief U.S. equity strategist and chief investment officer of Morgan Stanley, has said in recent weeks that the guidance cuts may not happen until companies report their fourth-quarter results early in the year. next year, if at all.

Currently, the S&P 500 is expected to achieve full-year earnings growth of 5.6% in 2022 and 3.9% in 2023, according to Sam Stovall, chief investment strategist at CFRA. This has fallen slightly since September 30, when investors expected annual growth of 6.3% and 7%.

Russian winter offensive could complicate market outlook

The Ukrainian army has recently succeeded in keeping Russian forces at bay. But that could change if Russia launches a winter offensive, according to Marenzi.

Russia has already called up thousands of troops and is preparing to send them to the front.

Historically speaking, “winter has been their friend,” Marenzi said of the Russian military. “And I think that might end up being their friend again.”

A Russian advance in Ukraine would likely hurt risky assets like stocks, Marenzi said, while benefiting traditional safe havens like the dollar, Treasuries and GC00 gold.
-0.92%.

Speaking of equities, major US indexes ended Wednesday down sharply after a volatile session.

The Dow Jones Industrial Average DJIA,
-1.55%
fell 505 points, or 1.6%, to end at 32,147.76 after briefly rising above 33,071 at the session high, according to FactSet. The S&P 500 SPX index,
-2.50%
fell 2.5% and the Nasdaq Composite Index COMP,
-3.36%
closed down 3.4%, the biggest daily decline for both indexes since Oct. 7.

Treasury reports TMUBMUSD02Y,
4.607%
also spiked after experiencing similar levels of volatility. The yield on the 2-year note rose 3 basis points to 4.568% based on 3 p.m. ET levels, its highest level in two weeks.