Much higher-than-expected inflation readings and the worst consumer sentiment in history have pushed stocks into a full-fledged bear market. After resisting for many months, the S&P 500 finally broke below the 20% threshold, and that enabled the business media to finally start using headlines with the phrase "Bear Market."
Not only do stocks look extremely poor technically, but the economic news is some of the most dismal since 2008-2009. Inflation is raging, gas prices are still running higher, worries about a slowing economy are building, and there is little confidence in either fiscal or monetary policy.
We now have an ugly bear market and a hawkish Fed, which is not a combination we have seen before. The Fed usually becomes more hawkish after stocks have performed very well, not as they crumble into bear markets.
That is the setup as we head into the Federal Open Market Committee interest rate decision at 2 p.m. ET here on Wednesday. Fed Chairman Jerome Powell will hold a news conference following the decision's release.
For several months the expectation was that the Fed would hike rates by 0.5% in June, July and maybe September, too. That changed following the hotter-than-expected inflation reading that has caused both equities and bonds to collapse.
The expectation now is that there will be a hike of 0.75%, and some market participants hope for a full point or more.
In the past, the market always has rooted for a dovish Fed, but the worry now is that the Fed has lost control of the situation and that it needs to show the market that it is willing to be aggressive and take control of matters.
The obvious danger is that the more aggressive the Fed is with hiking rates, the more likely it is that the economy will tip into a recession. Some pundits already believe that a recession is inevitable, but the Fed has sent the message that it can engineer a soft landing.
An additional danger is that the rate hikes won't have that much impact on inflation. Some of the higher prices are structural and aren't as sensitive to economic growth. Slowing growth will only fix the supply chain and energy demand to a certain degree. The Fed aggressively can hikes rates, but if doing so only has a limited impact on inflation, then we are in danger of stagflation, which is the worst combination of all.
The more immediate issue today is how the market will react to the Fed. The consensus view now is that the market wants a more aggressive Fed, but will that produce anything more than a short-lived bounce?
Many market players are looking for a positive response to a 0.75% hike, but the expectation has increased so quickly that it is already discounted to some degree. In addition, this market has trapped many holders who are looking for a way to lessen exposure into strength. There is significant overhead resistance, and the Fed is sopping up much of the liquidity that the market has counted on in the past.
The market has an inclination to celebrate Fed action, but the main question at this point is whether that action will be sufficient to drive a sustained positive response. While it is possible, it isn't something that I would be on at this point.
We have some positive anticipation in the early going, but we will need to wait until this afternoon for the real fireworks.