FOMC Looms: 'Irrational Exhuberance' 2.0?

Core Viewpoint - Wall Street is preparing for a highly anticipated FOMC meeting, with expectations of a potential interest rate cut amid mixed economic signals, including slightly elevated inflation and healthy GDP growth [1] Group 1: Interest Rate Expectations - The Federal Reserve's mandate is to achieve maximum employment and stable prices, with a long-term inflation goal of 2%. Recent job growth revisions indicate a weaker economy, supporting calls for lower interest rates [2] - A 25-basis point cut is the most likely outcome, with the CME FedWatch Tool indicating a 96% probability for this cut, while PolyMarket shows a near-certain 90% chance [3] Group 2: Market Volatility - Investors should brace for increased volatility as FOMC meetings typically result in price swings averaging around 1%. Additionally, the upcoming monthly options expiration may exacerbate market fluctuations [5] Group 3: Market Trends and Seasonality - Historically, FOMC days can mark significant turning points in equity markets, with the Nasdaq 100 Index recently experiencing ten consecutive daily gains. There is speculation whether this event will trigger a 'sell the news' reaction [6] - Late September is generally a weak period for stock performance, although Q3 pullbacks can set the stage for a year-end rally [8] Group 4: Historical Context of Rate Cuts - Rate cuts near market highs have historically led to positive outcomes, with the S&P 500 rising in all instances when the Fed cut rates within 1% of its all-time high. The median return one year later was 15% [10][11] - The current market environment may mirror the 1996 scenario, where a rate cut preceded a significant market advance, particularly benefiting AI-related companies [11] Group 5: Market Sentiment - Despite substantial market gains, investor sentiment remains cautious, with more bearish than bullish perspectives, which could signal a contrarian bullish opportunity [12] - Historical data shows that when the S&P 500 rises 30% or more in five months, it tends to continue to perform well in the following months, with an average rally of 18.1% [13]