Tuesday's Market Minute: Next Up: The Fed

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It does not take a high-level investor to know there is panic rippling through the economy. With the Nasdaq plunging as much as 4% intraday Monday, yet closing 0.5% higher, most of us are having a difficult time gauging the unique volatility in each turbulent session. With the unprecedented rally in the equity markets over the last 24 months, green indices have become a lot more familiar than red. Outside of the March 2020 plunge, which feels like a distant memory given the exuberance that followed (SPX +110% from 2020 lows through 2021), a bull market is essentially all I have ever known. A lot of this recently has been a product of the Federal Reserve’s inflated balance sheet, which sits at roughly $8.8T as of this month. Plus, enthusiasm has been fueled by rising interest from retail traders in meme stocks, SPACs, cryptocurrencies, and red-hot EVs.

But this has left room for a flurry of theories on where we bottom from here. The Nasdaq currently sits -15% from November 2021 highs, undoubtedly a correction – but many believe it has further room to slide. Historically, the index dropped 20%, 24%, and 33% in 2015, 2018, and 2020, respectively. This shows that history has proven a deeper correction than 15% is always in the cards. Many have called for this “bubble” to burst, with so much money poured into high-growth, high-valued names, thus creating rocket-high valuations relative to earnings, which many are now claiming was overdone (cough, cough… Netflix, Peloton).

However, the opposing case is just as fierce. JPMorgan Chase has told its clients to stay bullish, noting that positive catalysts are not yet exhausted. The firm stated that potential risks, including hawkish central banks, uncertainty regarding regulation in China, and continued turbulence from new COVID-19 variants are already priced into current valuations.

Prior to last Wednesday, the Nasdaq has registered a correction 65 times since launching in 1971. According to the Dow Jones, of those corrections, 37% have resulted in bear markets, or declines of at least 20% from peak highs. But then the case could also be made that 63% of those previous corrections over the last five decades have not resulted in bear markets. Plus, the current losses only erase a small portion of the broader market’s gains over the last few years. The S&P 500 jumped almost 27% last year, well above 16% in 2020 and almost even with 29% in 2019.

Speculation aside, corporate earnings have taken a serious back seat to the Fed meeting tomorrow. Markets are now expecting the Fed to raise its interest rate at least three times year, in addition to shrinking its balance sheet into this spring. Next steps on bond buying, and an expected tightening in monetary policy, will be crucial to assessing any sort of future direction in markets – and traders, technicians, analysts, bears, bulls, hawks, doves, and myself will be closely watching.

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