Stocks Have Recently Bounced Back After FOMC Meetings

The S&P 500 Stock Index ($SPX) (SPY) has tended to move higher after Fed decisions over the past year.  With the S&P 500 falling more than -6% over the past six trading days, there is a possibility that the expected +75 bp interest rate increase from the Fed today could spark a relief rally in stocks, particularly since there are some outside fears of a +100 bp rate hike.

Over the past year and half, the S&P 500 Index has rallied after eight out of ten FOMC meetings. In the days following the Fed meetings in January, March and June, stocks rose between 6% and 9%, having dropped sharpy in the run-up to the FOMC meetings.  Commonwealth Financial Network said “expectations are very hawkish, so the Fed can come out just as expected and still be more dovish than expected. That likely limits the market downside from the FOMC meeting and just may provide some upside going forward.”

Stocks have been under pressure this week after the 10-year T-note yield soared to an 11-year high of 3.60%, sparking heavy short selling and liquidation of long stock positions. However, extreme bearish positioning could be a source of support for stocks.  According to the Bank of America’s latest monthly survey, fund managers are the most underweight equities they’ve ever been, while cash levels are at their highest on record.

Another gauge of stock bearishness also shows a highly negative view.  CFTC data shows that S&P 500 net non-commercial futures positions have reached bearish levels last seen during the downturns of 2008, 2011, 2015, and 2020.  Such bearish sentiment is often seen as a contrarian indicator, signaling a possible rebound in stocks. 

Yet, U.S. equity valuations remain elevated compared with history with previous economic downturns, keeping some investors wary with the Fed still raising interest rates.  Also, Blackrock maintains an underweight stance on equities, saying “recession risks still aren’t factored in” to stock prices.

Nomura Securities says supply-demand dynamics are setting up U.S. equities for more softness, with macro funds building up short positions after the latest U.S. inflation data.  Nomura said macro funds “will stay to the short side in U.S. stocks at least until the release of the employment data” on October 7. Conversely, JPMorgan Chase said “robust earnings, low investor positioning, and well anchored long-term inflation expectations should mitigate any downside in risk assets from here.”

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