U.S. stock markets are in the midst of a “patient panic’ ahead of Wednesday’s Federal Reserve meeting when many investors anticipate a change in the Fed’s language that would send the clearest signal yet that a rate hike is coming soon.
The S&P 500 has dropped 2.6 percent since February’s stronger-than-expected jobs report a week ago which heightened expectations for an interest-rate increase as early as June.
If Fed Chairman, Janet Yellen, drops a pledge to be ‘patient’ about rate hikes in the Fed’s statement at the upcoming policy meeting, investors should expect an additional fall in stock prices. In fact, most economists expect Yellin to erase that word as a precursor to starting rate hikes in June.
However, Fed futures contracts indicate to futures traders that they can still expect the first increase in September, placing a low 19 percent odds on a June rate hike, compared with a 58 percent probability for September.
With inflation still low, many stock investors are still not ready for a June hike. This may change after Wednesday’s meeting, said Torsten Slok, Chief International Economist for Deutsche Bank Services in New York.
According to Slok, “ week, if she does remove ‘patient’ they could get the wake-up call.” He sees stocks selling off further.
Some strategists view the market’s decline as short-lived because the strength of the U.S. economy would trigger a rate hike that would ultimately bring up stocks.
Repeat of May 2013
Strategists are hoping to avoid a repeat performance of what took place in May 2013 when then Fed Chairman Ben Bernanke warned about conditions that might cause the Fed to reduce its $85 billion-a-month in bond purchases aimed at stimulating the economy. These predictions brought down the S&P by 5.8 percent between May 21st and June 24th and sent investors scrambling.
Eventually this “taper tantrum” eased as the Fed wound down its bond purchases and stocks rallied to a number of new records.
Faced with the first Fed interest-rate hike since June 2006, equity investors have more to worry about than in 2013 because a rapid rise in the dollar is expected to hurt many U.S. multinational companies.
Last Friday, the dollar hit its highest point against the basket of major currencies since April 2003 and it is on course for its strongest quarterly performance since the fourth quarter of 1992.
John Praveen the chief investment strategist at Prudential International Investments Advisers LLC in Newark, New Jersey says he “expects U.S. stocks to fall this week in a ‘patient tantrum.’ But he also sees a comeback and healthy gains over the next few quarters due to economic strength.