It's nice to run into a sure thing every once in a while, and in the coming week, it looks like Wall Street is going to get one.
Federal Open Market Committee will meet on Tuesday, and there is little doubt that it will abandon the path of gradualism and raise rates by a half-point. And in the statement that comes with the hike, the Fed will likely say risks are "weighted mainly toward conditions that may generate heightened inflation pressures," thus leaving the door open for further tightening.
But figuring how the market is going to react to this? That's another matter.
"It's really a junk ball here," says Gary Kaminsky, managing director of the asset management group at
Neuberger & Berman
. "Nobody knows where it's going to go."
Generally speaking, when the FOMC goes and does what everybody expects -- and over the past few years it has consistently done what everybody expected -- the market rallies. This time around it's less clear that that's going to happen, partly because there's a general sense that this won't be the last hike, and mostly because on Tuesday morning we're going to get a gander at the April
Consumer Price Index.
It was the March CPI, with its surprising intimation of higher inflation, that sent the market tumbling to fresh lows last month and sparked serious talk of a half-point rise in rates. Investors will use the April report to gauge the extent of further hikes. If the CPI, particularly its core, which excludes food and energy prices, comes in as hot as it did last time, it will start to look like the Fed has a heck of a lot more work to do.
"This CPI almost becomes a referendum on inflation," said Kevin Flanagan, money market economist at
Morgan Stanley Dean Witter
. "Was last month an aberration, or does it signify a new trend toward higher inflation?"
Happily, economists expect this CPI to be a bit tamer, with the headline gaining 0.1% against last month's 0.7%, and the core picking up 0.2% against last month's 0.4%. That's pretty bearable, and if the numbers come in at or below the consensus forecast, there's a good chance that investors will reckon the market has put in its bottom.
"It looks like we are completing such a retest of the April lows," said John Bollinger, president of
. "I think it's a pretty constructive environment." Still, Bollinger thinks it all comes down to how the market reacts to the Fed announcement, and that that reaction will dictate the direction for a while. It's one of those rare situations where being a trend follower might not be such a bad thing.
Even if things dip lower, nontechnology stocks may not have far to fall.
"For the past couple of years, the average stock has performed miserably compared to techs," said Steve Goldman, market strategist at
. "We've got values that really can withstand these rate rises. I think the market will be choppy, but I don't think we're ready to start a serious decline."
Technology, on the other hand, is going to continue to have trouble, thinks Goldman. "Any time it pops its head up there will be a massive number of sellers," he said. "It's not likely to stabilize until, say, the fourth quarter."
Whatever the market does Tuesday, it won't be long before it puts this Fed meeting behind it and starts thinking about the next one. "Our memories won't be very long with this," said Flanagan. "Attention will move quickly to the future."
And so, the drudgery of watching the Fed will plod on. "Sometimes," said Bollinger, "it feels like I've spent half my life waiting on Alan."