Fed Watch: Will Jerome Powell Goose the Stock Market?

Core Viewpoint - The Federal Reserve's upcoming FOMC meeting is highly contentious, with potential market implications depending on the outcome and tone of the meeting [1] Market Expectations - A month ago, futures indicated a 50% chance of a rate cut, leading to significant market volatility, with indexes falling about 6% from their highs, while speculative areas faced more severe declines [2] - Currently, the probability of a rate cut is approximately 90%, but markets anticipate this to be the last cut until at least June of the following year, raising concerns about potential market reactions [3] Federal Reserve Communication - Chair Jerome Powell has maintained a conservative communication style, which may continue as he emphasizes that policy rates are near appropriate levels and that the committee will remain data-dependent [4] - If Powell adopts a hawkish tone, it could lead to a bearish market response, indicating less liquidity and potentially cooling the recent stock market enthusiasm [5] Sector Performance - Excluding technology, healthcare (XLV) and energy (XLE) sector ETFs have been the strongest performers over the past three months, suggesting a positive momentum signal [8] - Momentum strategies have historically generated excess returns, and sector rotation is seen as a reliable method to capture this edge, making healthcare and energy favorable sectors at this stage [9] Defensive Positioning - If the Fed delivers a rate cut but pairs it with a restrictive message, the market may need time to adjust, leading to a potential consolidation phase where investors may seek sectors with steadier earnings and lower volatility [10] - Healthcare and energy sectors are positioned well to absorb market rotation, as they have begun to outperform and remain underowned after periods of neglect [11] Future Market Dynamics - The initial market reaction post-FOMC meeting may be sharp, but the emerging leadership in sectors like healthcare and energy could indicate a shift away from the tech-driven rally that characterized much of the year [12]