It could be a watershed week for the young rally in stocks as the Federal Reserve announces its next interest rate move. The Federal Open Market Committee meeting on Tuesday and Wednesday is shaping up as a particularly dramatic one, with a debate raging over whether the policymaking body will cut rates by a quarter or half percentage point (few expect the Fed to leave rates unchanged). On Thursday, The Washington Post cast its lot with the 50-basis-point camp, publishing a story suggesting Fed officials are willing to risk a big easing because inflation is practically nonexistent. The Wall Street Journal chimed in the next day, citing Fed officials who said a 25-basis-point cut was more likely. According to the Chicago Board of Trade, the July federal funds futures are factoring in a 100% chance that rates will be cut by at least 25 basis points next week. But as of July 19, futures were split on whether that cut would be a quarter or half point, with futures assigning a 66% chance to the former and a 34% chance of the latter. "You can make a case for 25. You can make a case for 50. But the Fed will probably say they expect an upturn, but the economic recovery is spotty and we're taking out insurance," said Jim Awad, president and market analyst at Awad Asset Management. "The economic data is mixed, on a rolling basis. It shows tentative signs of getting better, but they really are going to have to start hearing it from corporations. They'll have to say it's getting better. To say it's not getting worse won't hold recent gains anymore." No matter what the Fed decides, Awad believes the upward momentum will continue for another week, if only because of end-of-quarter window dressing.
Last week, the Dow Jones Industrial Average shrugged off lukewarm economic data and posted a gain of 83.63 points, closing at 9200.75. The Nasdaq rose 18.54 points, ending at 1645.03, while the S&P 500 rose 7.10 points at 995.71. Since March 11, all three indices are up more than 20%. "I think the market can come to terms with whatever the Fed decides. They're going to try to keep the rally alive for another week," said Awad. "People desperately want a good quarter after three bad years." "People are going to try to keep the rally alive for one more week, and then comes the reality check, with the second-quarter earnings reports in July," Awad said.