Wall Street On Edge As Traders Look Forward To Fed's First Rate Cut In 4.5 Years: Strategist Says This Will Dictate How Stocks Perform Longer Term

The index futures are slightly higher early Wednesday as traders turn defensive ahead of the all-important Federal Reserve meeting of the year. As is characteristic of a Fed decision day, stocks could mostly move sidewards in a narrow range until the rate decision is announced. The trading direction will likely depend on several factors, including any changes in the Fed’s language in the post-meeting policy statement, the growth, inflation, and rate forecasts provided in the Summary of Economic Projections, and Chair Jerome Powell‘s comments during the subsequent press conference.

While the betting and futures market suggests a 50 basis point could be on the table, most economists are resigned to a more modest 25 bps cut. Some strategists even worry a bigger cut could be interpreted as a confession from the central bank that the economic conditions are a cause for concern.

Futures	Performance (+/-)
Nasdaq 100	+0.17%
S&P 500	+0.14%
Dow	+0.16%
R2K	+0.17%

In premarket trading on Tuesday, the SPDR S&P 500 ETF Trust SPY added 0.10% to $563.66 and the Invesco QQQ ETF QQQ gained 0.11% to $473.99, according to Benzinga Pro data.

Cues From Last Session:

On Tuesday, a stronger-than-expected increase in August retail sales set in motion a strong buying wave, which, however, could not be sustained in the afternoon session. As a result, the major indices ended narrowly mixed. The S&P 500 rose for a seven straight session, hitting an intra-day high amid the early buying. The broader gauge, however, came off the high and ended marginally higher. It is now at its best level since Aug. 23.

Index	Performance (+/)	Value
Nasdaq Composite	+0.20%	17,628.06
S&P 500 Index	+0.03%	5,634.58
Dow Industrials	-0.04%	41,606.18
Russell 2000	+0.74%	2,205.48

Insights From Analysts:

Offering his take on the focus of the market, Scott Merkle, managing partner of SLB Capital Advisors, said a cut is locked in, and the “market will now turn its attention to deciphering the meaning of a 25 basis point versus a 50 basis point reduction.” The strategist expects a reduction by 25 basis points from the 5.25%-5.50% level where the Fed funds rate is currently.  

“The Fed is likely to start small to provide an opportunity to adjust in future periods,” he said, adding that lower rates will reinvigorate M&A activity, the sale-leaseback market and lower financing costs.

LPL Financial Chief Technical Strategist Adam Turnquist said, that in the last nine major rate hiking cycles since the 1970s, the S&P 500 has generated mixed, modest returns over the three months following the first cut, with 12-month average and median returns of 5.5% and 10.8%, respectively.

The 12-month maximum drawdowns following the first cut have been around 19%–20%, larger declines than the average maximum drawdown for all years since 1974 of 14.4%, he added. “How the economy holds up and if we enter or avoid a recession will ultimately dictate how stocks perform over the longer term,” he added.

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Upcoming Economic Data:

• The Commerce Department will release the housing starts and building permits report at 8:30 a.m. EDT. Economists, on average, expect housing starts to come in at a seasonally adjusted annual rate of 1.31 million units in August, up from a 1.24 million rate in July. Building permits, a measure of future activity, may have remained almost unchanged at 1.41 million units.
• The Energy Information Administration is scheduled to release its weekly petroleum status report at 10:30 a.m. EDT.
• The Federal Reserve will release the post-meeting policy statement, along with the Summary of Economic Projections at 2 p.m. EDT. Powell will host a press conference at 2:30 p.m. EDT to explain away the rate decision and the rate outlook.

Stocks In Focus:

• United States Steel Corporation X climbed over 3% in premarket trading after the Committee on Foreign Investment in the United States reportedly allowed time for the steelmaker’s pursuer Nippon Steel to close the deal, thereby keeping it alive.
• General Mills, Inc. GIS is due to release its earnings report ahead of the market opening, while Steelcase Inc. SCS will report after the close.

Commodities, Bonds And Global Equity Markets:

Crude oil futures fell sharply, extending their steep loss from Tuesday, while gold futures rose modestly, ahead of the Fed decision. The benchmark 10-year Treasury note rose 2.4 points to 3.666%. Bitcoin BTC/USD gained and approached the $60K psychological resistance.

In the currency market, the dollar was weaker against its major counterparts.

The major Asian markets that were open showed nervousness and settled mostly lower amid apprehension ahead of the U.S. Fed decision. The Australian, Japanese and Chinese markets bucked the downtrend, while the Hong Kong and South Korean markets were closed for public holidays.

European stocks were mostly lower in early trading, as market participants digested domestic inflation data and looked forward to the Fed decision.

• Read Next: Ahead Of FOMC Meeting Paul Krugman Says Fed Rates Will Be Elevated Even With 50 Bps Cut: ‘Argument For Incrementalism Is Very Weak’

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