The stock market has been remarkably resilient lately, but the Federal Reserve could be a potential game-changer.
In spite of recent economic indicators pointing to higher consumer and producer prices alongside weaker retail sales, the market has managed to maintain a relatively stable stance.
The S&P 500 saw only a marginal 0.2% decline for the week, while the Dow Jones Industrial Average recorded a modest 0.1% gain, and the Nasdaq Composite experienced a 0.7% drop.
While the stock market has not displayed significant concerns regarding inflation, other financial markets have reacted differently.
The federal-funds futures market now suggests a 58% likelihood of a Fed rate cut by July, down from 75% in December.
Meanwhile, the two-year Treasury yield has risen by over 30 basis points this year, indicating heightened expectations for the fed-funds rate.
Despite these warning signals, the stock market appears unperturbed.
However, this could change following the Federal Reserve's upcoming monetary policy meeting. Although it is improbable that the Fed will adjust rates, the signals regarding future rate cuts could significantly impact investor sentiment.
A scenario in which the Fed quashes hopes of rate cuts could prompt a negative market reaction.
Some analysts argue that the market is demonstrating signs of underlying strength, with over 60% of S&P 500 stocks registering gains this year.
This suggests that the market is not overly dependent on a few tech giants for its performance. Furthermore, sectors like energy and materials have recently experienced gains, indicating a broader strength in the market.
The key question now is whether the Federal Reserve will trigger a market rotation that could potentially lead to a downturn.
The answer to this question may become clearer following the conclusion of the Fed's meeting this week.
For more information, please contact Jacob Sonenshine at jacob.sonenshine@barrons.com.