Markets Book Profits Ahead of Fed Decision

This story originally appeared on Zacks

Market indexes closed off their session lows this Tuesday, but also could not sustain the afternoon climb toward the green, and slid — much like we saw in Monday’s session — back down in the last half-hour of trading. The Dow finished -0.30%, -105 points, the S&P 500 was -0.74% and the Nasdaq brought up the caboose, -1.14%, or -175.64 points. The small-cap Russell 2000 lost nearly a full percentage point on the day, -0.96%.
After near-40-year highs on both the Consumer Price Index (CPI) and Producer Price Index (PPI) in recent days, it is now a foregone conclusion on Wall Street that tomorrow’s Fed meeting is going to bring about much hawkish talk about tapering asset purchases, on the road to raising interest rates sooner than later. Not that this is an irresponsible move — higher rates are necessary to absorb inflation, which is now seen as the number-one threat to the U.S. economy in the near term.
Still, flattening out purchases will mark the end of the cheap money environment the Fed had put into place back in February 2020, on the first flashes of Covid-19 threatening to bring about a global pandemic (and international economic shutdowns). Even when inflation metrics started coming in hot, Chair Jay Powell led the Fed toward inaction, stating that supply constraints as the global marketplace reawakens from the pandemic together created inflation that was “transitory.” That word is now retired in terms of Powell’s current economic view, and the tightening is expected to advance tomorrow.
This is why market participants are taking the opportunity to book gains ahead of Wednesday’s Fed announcement. We’re nowhere near a bearish trading mode: while it’s true the Nasdaq is now -6% off its all-time closing highs earlier in the year, it’s still +20% year to date. The Dow is still trading above its 50-day moving average, -3% from all-time highs, and the S&P 500 has made year-to-date gains squarely between the +28.9% made in 2019 and the +16.3% from 2020. So consider this recent sell-off period a reasonable positioning to come back in to strong market performers once this dust settles.
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