A volatile stock market faces a critical test this week, when the U.S. Federal Reserve is expected to raise interest rates and give more insight on its plans for tightening monetary policy to fight surging inflation.
Compounding concerns over monetary policy, investors have been riled by everything from rising bond yields to the war in Ukraine and more recently lockdowns in China. The market is also entering a historically weaker six-month period for stocks. “If the Fed continues to expect high levels of inflation and they don’t see it moderating in the future, that will be a concern for investors,” said Michael Arone, chief investment strategist at State Street Global Advisors. “It will mean that the Fed will continue to raise rates and tighten monetary policy, which the market is expecting, but maybe even more aggressively.”
Given that there are indications inflation has started to peak, said Kei Sasaki, senior portfolio manager at Northern Trust Wealth Management, “if there is an even more resounding hawkish tone coming out of that meeting, then that could certainly be viewed as negative.” Meanwhile, investor sentiment is dour. The percentage of individual investors describing their six-month outlook for stocks as “bearish” rose to 59.4 per cent, its highest level since 2009, according to the latest weekly survey from the American Association of Individual Investors.