What’s next for markets after the Fed’s fourth consecutive jumbo rate hike

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What’s next for markets now that the Fed has delivered its fourth and possibly last 75 basis point jumbo rate hike?

Well, a lot, actually.

The sometimes tumultuous third-quarter earnings season isn’t over yet. A packed calendar of economic data for the coming weeks includes key readings on inflation and the labor market. On top of that, the US midterm elections could result in the Democrats losing control of one or both houses of Congress.

MarketWatch spoke with several market gurus about what investors need to watch out for and what it could mean for their portfolios.

Inflation and employment data could force the Fed to keep rates ‘higher for longer’

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

In fact, stocks initially rose after the Fed’s monetary policy statement on Wednesday signaled that a slower pace of rate hikes was on the way. But indices ended the day sharply lower after Chairman Jerome Powell, in his news conference, said it was premature to “pause” rate hikes and that the terminal, or peak, interest rate would likely be higher. than policymakers had anticipated in September.

Rex nut: How Powell walked away from the Fed’s dovish message and tanked markets

Although headline inflation has eased from the fastest pace in more than 40 years, core prices are still accelerating at an uneasy 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 expenditures index, the Fed’s preferred barometer of inflation pressures, on December 1.

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

“I think certainly the payroll number is important, and it’s all about what it means for inflation,” Ablin said.

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

“The higher inflation push sets a high bar for the Fed to end the current rate-raising cycle and an even higher one to start cutting rates,” said Bill Adams, chief economist at Comerica Bank.

Midterms and the return of the stagnation

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

“We often see a rally in stocks after the election, no matter the outcome,” said Callie Cox, US investment analyst at eToro.

Watch: What the midterms mean for the stock market’s ‘best 6 months’ as favorable calendar streak gets under way

Some investors think Republicans retaking the House or Senate could be bullish on stocks, said Octavio Marenzi, chief executive of market-focused management consultancy Opimas.

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

“Markets could look favorably on a Republican takeover of at least one of the houses [of Congress],” he said.

Profits still important

Corporate earnings growth has held up surprisingly well so far this year despite forecast cuts and ominous rhetoric from corporate executives, eToro’s Cox said.

But 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%
earnings reported last week.

Read: Amazon, Meta and Alphabet now require ‘perfection’, says analyst in Big Tech ‘autopsy’

Investors are still awaiting earnings from more than 150 S&P 500 companies, according to FactSet. Beyond that, there is also a risk that cuts in earnings forecasts could affect share prices, market strategists said.

Chief US equity strategist and chief investment officer at Morgan Stanley Michael Wilson has said in recent weeks that guidance cuts may not come until companies report fourth-quarter earnings early next week. year, if they do.

Right now, the S&P 500 is expected to post full-year earnings growth of 5.6% in 2022 and 3.9% in 2023, according to Sam Stovall, chief investment strategist at CFRA. That has dipped slightly since Sept. 30, when investors anticipated 6.3% and 7% annual growth.

A Russian winter offensive could complicate the outlook for markets

The Ukrainian military has lately managed to keep Russian forces at bay. But that could change if Russia launches a winter offensive, according to Marenzi.

Russia has already been calling up thousands of troops and preparing to send them to the front lines.

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

A Russian advance on Ukraine would likely hurt risky assets like stocks, Marenzi said, while benefiting traditional havens like the dollar, Treasuries and GC00 gold,
-0.63%.

Speaking of equities, the major US indices closed lower on Wednesday after a volatile session.

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

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

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