The significant day has arrived as the Federal Reserve is poised to announce its latest monetary policy decision. Traders throughout Wall Street anticipate that the Fed will reduce rates, concluding the tightening cycle initiated in March 2022. Despite this expectation, investors remain uncertain about the magnitude of the rate cut. According to the CME Group’s FedWatch tool, there is a 65% probability of a half percentage point reduction. Nevertheless, traders are adopting cautious strategies.
Chris Murphy from Susquehanna noted, “The most interesting options trades on Tuesday seemed to involve hedging against a 50 basis point cut and preparing for potential disappointment with a 25 basis point cut.” Murphy clarified that this does not necessarily mean traders expect a 25 basis point reduction; rather, they perceive it as having more than a 30% chance and are adjusting their positions accordingly.
This announcement follows a day after the S&P 500 achieved an intraday record of 5,670.81, which nearly completed its recovery from a late-summer downturn that almost led to a correction. Despite this, it closed over 30 points below the all-time high closing mark of 5,634.58 set in July.
Jonathan Krinsky, BTIG’s chief market technician, believes the market faces a challenging situation ahead of the decision. He stated, “There are viewpoints suggesting it doesn’t matter whether the rate cut is 25 or 50 basis points as long as the dot plot shows a 100 basis point expansion by year-end. We agree with that perspective but also think the likelihood of a ‘false breakout’ is high.” Krinsky highlighted the unusual level of uncertainty so close to a meeting.
Investors should likely brace for volatility. Over the 20 Fed meetings since the beginning of the rate-hiking campaign, the S&P 500 has experienced twelve movements of at least 1%, including four swings exceeding 2%. The bottom line advises investors to proceed cautiously into the announcement.
In other developments, Barclays has upgraded VF Corp from equal weight to overweight. Analyst Adrienne Yih indicated that the current levels present an attractive risk-reward balance. Yih added, “We believe we will begin to see incremental sequential improvement in company fundamentals over the next four to six quarters, starting modestly in the fall season of 2024.”
