US Stocks Hover Near Record Highs as Traders Debate Fed Rate Cut

 

US stocks remained near all-time highs on Tuesday as traders awaited the Federal Reserve's (Fed) crucial rate cut decision, with markets divided on whether the Fed will opt for a 25 or 50 basis-point reduction.

The S&P 500 closed relatively unchanged, briefly crossing a record high threshold amid stronger-than-expected US retail sales data. Economically sensitive sectors outperformed technology stocks, while Treasury yields edged higher, led by shorter maturities. Market-implied odds for a 50-basis-point rate cut on Wednesday stood at around 55%.

Market observers suggest that investor reaction could be the most critical factor following the Fed's decision. A 25 basis-point cut could leave traders worried that the Fed is behind the curve, while a 50 basis-point move might signal the economy is in worse shape than expected. Investors will be watching Fed Chair Jerome Powell's comments closely for reassurance.

According to Bespoke Investment Group, it’s rare for markets to be this uncertain about the Fed’s actions so close to the decision. A survey by 22V Research revealed mixed expectations: investors split on whether a 25 basis-point reduction would trigger a “risk-on” or “risk-off” reaction, while those expecting 50 basis points view a smaller cut as “risk-off.”

While the S&P 500 closed near 5,635, both the Nasdaq 100 and Dow Jones Industrial Average were little changed. The Russell 2000 index of smaller firms gained 0.7%. Meanwhile, Treasury 10-year yields rose by two basis points to 3.64%, and the dollar strengthened.

Historically, market performance has been mixed after the first rate cut of a new easing cycle. On average, the S&P 500 has seen a 0.56% decline from the close on the day before the first rate cut to one week later, with eight of 10 sectors averaging losses. However, technology and communication services have tended to buck this trend with gains.

Matt Maley at Miller Tabak suggests that the Fed will either cut by 50 basis points or opt for a 25 basis-point reduction but signal a more aggressive approach in the future. However, he cautions that this may not guarantee a significant rally in the stock or bond markets. Given that the stock market is nearing overbought territory, there could still be a "sell the news" reaction to the Fed's decision.

Quincy Krosby at LPL Financial and Ryan Detrick at Carson Group emphasize the importance of the Fed's communication strategy, noting that a 25 basis-point cut would likely come with a dovish tone. Steve Sosnick at Interactive Brokers believes that the Fed should lean towards a 25 basis-point cut, although he acknowledges that the market seems to be expecting a larger move.

Kristina Hooper at Invesco expects a 25 basis-point reduction, arguing that a bigger cut might raise concerns about the state of the US economy. She noted that the last time the Fed started an easing cycle with a 50 basis-point cut was in March 2020, during the onset of the global pandemic, and the current situation is not as dire.

Hooper added that Powell's press conference would be crucial in building confidence among those worried about a potential recession. "It will be valuable to hear Powell’s thoughts on the expected path of rate cuts — particularly what conditions could trigger a change of course, either a moderation or acceleration in easing," she said, noting that the press conference is "must-see TV."