“Equities are hoping that the Fed is almost done or [for] signals that they’re going to pause. I think it’s too premature for them to do that,” said George Goncalves, head of fixed income strategy at Nomura. “The Fed was a little too optimistic for next year, and now they’ve got to come down. The recent price action is almost an overshoot on the bearish side.”
The Fed should tweak its economic forecast, and it could note that it has concerns about global growth. Powell is also expected to hold a briefing, where he could discuss Fed officials’ concerns about the impact of trade wars and possibly financial conditions.
There has been some speculation the Fed could hold off on a rate hike Wednesday, but it is widely expected to move forward and use its forecast and dovish tone to ease market fears that it is moving too aggressively.
“Is the change in tone going to be enough to jump-start this market that only reacts to bad news? It may well be. It may be the pivot point,” said Art Hogan, chief market strategist at B. Riley FBR.
Some strategists said if the Fed sparks a rally, there’s a chance stocks could find a near-term bottom.
Robert Sluymer, technical strategist at Fundstrat, said key for the stock market will be how it trades coming out of the Fed meeting. “I think it’s huge,” he said. “A tremendous number of stocks have been selling off through 2018. You have a lot of weak stocks, but they’re also deeply oversold from an intermediate standpoint. … My guess is coming out of the Fed you’re going to see some relief from that.”
Sluymer said the market is testing the lows of its 2018 trading range. The S&P 500 closed at 2,599, off 1.9 percent Friday and 1.2 percent for the week. It is now down 2.8 percent for the year.
“I think the markets want way too much out of the Fed. Market participants want a knight in shining armor,” said Goncalves. Goncalves said Nomura expects the Fed to eliminate one of the rate hikes in its collective forecast for next year, taking it to two instead of three on its so-called “dot plot.”
Trade-war worries and the Fed’s interest rate hikes have topped the list of what’s scaring risk markets and sending buyers into safe havens like Treasurys. On Friday, stocks plunged after a surprise slowing of consumer and industrial data in China, even though U.S. retail sales were strong and economists upped their outlook for fourth-quarter growth to 3 percent.
But the U.S. economy is expected to grow at a slower pace next year, and the Fed is expected to emphasize its policy decisions will be dependent on data. Economists expect growth to fall from about 3 percent to 2.4 percent next year, according to CNBC/Moody’s Analytics rapid GDP update.
“If the Fed sounds overtly too dovish, it sounds like they’re trying to appease the equity market. If they end up being too dovish they run the risk of having us wonder what they know that we don’t know,” said Goncalves.
Patrick Palfrey, equity strategist at Credit Suisse, said the economic outlook and earnings expectations are still solid but the global economy has weakened somewhat and the market has to adjust. “If you look at valuations in the sell-off, what the market is pricing at the moment is a recession, an economic recession or a profit recession. The question is when you look at ISM or the pace of job gains, the question is are they recessionary? And the answer is no,” Palfrey said.
Goncalves said the Fed will be careful not to be too fearful about the economy. “The economy is not yet at a point where you can say clearly that we’re heading for a downfall,” he said.
Besides the Fed in the week ahead, there are a few earnings reports, including Oracle on Monday, Micron and FedEx on Tuesday, and Nike on Thursday.
Economic reports include homebuilders sentiment on Monday, home sales Wednesday and personal income and durable goods Friday.
Earnings: Oracle, Red Hat, Heico
8:30 a.m. Empire State manufacturing
10:00 a.m. NAHB survey
4:00 p.m. TIC data
Earnings: FedEx, FactSet, Darden Restaurants, Micron, Jabil Circuit, Navistar, Worthington Industries
Two-day FOMC meeting begins
8:30 a.m. Housing starts
8:30 a.m. Business leaders survey
Earnings: General Mills, Paychex, Winnebago, Herman Miller, Rite Aid, Pier 1 Imports
8:30 a.m. Current account
10:00 a.m. Existing home sales
2:00 p.m. FOMC statement, projections
2:30 p.m. Fed Chairman Jerome Powell press briefing
Earnings: Nike, Walgreen Boots Alliance, Carnival, Sanderson Farms, Actuant, Accenture
8:30 a.m. Initial claims
8:30 a.m. Philadelphia Fed manufacturing survey
8:30 a.m. Durable goods
8:30 a.m. Real GDP Q3 final
8:30 a.m. Personal income/spending
10:00 a.m. Consumer sentiment