The stock market has been eerily calm over the past few trading days. Despite a rocky start to last week, the S&P 500 ended up making new all-time highs by Friday.
This, in turn, drove the VIX lower:
(Charts courtesy of TradingView.com)
Even though volatility has had a small bounce since Friday’s lows, we’re still not seeing much movement in the S&P 500, which was down only 0.2% today.
So what’s going on?
The answer is that there’s a big 2-day Federal Reserve meeting concluding today. Afterward, Fed chairman Jerome Powell will speak about what the Fed has decided to do moving forward.
Until then, the market is holding its breath.
This Fed decision is likely to be a pivotal one. On the one hand, if the Fed signals concerns about inflation and economic overheating, they are likely to raise interest rates, which will hurt equity markets. On the other hand, the recent talk from the Fed has all been about “transitory” inflation, meaning fleeting inflation that is a result of short-term economic factors and not likely to persist (and thus not worthy of Fed intervention).
If the Fed signals that they are looking at raising interest rates (which they will have to eventually), the questions then become “by how much” and “over what timeframe.” If the market doesn’t like the answers to those questions, we will likely see a selloff of inequities.
However, suppose the Fed decides not to do anything for the time being or signals a very distant and gradual increase in interest rates. In that case, we are likely to see a rally in the equity markets as stocks respond favorably to more easy money.
Either way, the bond market is the one to watch to gauge the initial reaction.
Chairman Powell is scheduled to speak at 2:30 pm, Eastern time. His remarks are likely to steer the course of the stock market: do we begin a new leg of this longest-ever bull market? Or do stocks finally have a long-overdue reckoning and a chance to rein in the high valuation multiples?
Given the risk to either side, I’m not looking to initiate any new positions today. I will wait to see what happens with the Fed announcement and, more importantly, how the market responds. I’d suggest that you do the same.
Over the last few weeks, we have shared a couple of Chris Burgess’ market update emails which we feel are packed full of helpful information. We believe his market updates are educational, timely, and actionable, which is why his content has found a home in the official Tradesmart blog. Today's blog post originally appeared in his market update email from July the 15th, and if you like what you read, please let us know! Thank you for reading and we will see you next Thursday!