The broad stock index posted a rally as US Treasury yields fell. History shows that the completion of the Fed’s monetary tightening cycle leads to growth in the S&P 500. Let’s talk about this topic and draw up a trading plan.
Weekly S&P 500 fundamental forecast
It was the best week of the year and the longest rally in two years. The S&P 500 had a real holiday amid falling US Treasury yields due to Treasury cuts, hints from the Federal Reserve that it would end monetary tightening, and disappointing US jobs report for October. Longs entered at 4177 look promising, and the bulls are waiting for the continuation.
If the Fed’s monetary restriction is complete, the S&P 500 should continue its rally. According to HSBC research, over the past 30 years, the average stock index has risen 13% nine months after the last rate hike. In situations where the US economy avoided a hard landing, the indicator soared by an average of 22% between the end of the cycle and six months after the first easing of monetary policy. That puts the bank on track to forecast double-digit growth for the S&P 500 in 2024 as investors anticipate a dovish Fed turn in June.
S&P 500 reaction to completion of Fed’s monetary tightening cycle
The world’s largest asset manager, BlackRock, is less optimistic. According to the company’s analysts, the stock market has not yet a bull market; it will continue to jump up and down in 2023, as investors have not yet fully realized the transition to a new policy of high interest rates. If inflation stops around 3% rather than continuing to fall towards the 2% target, borrowing costs will remain at elevated levels for a long time. Given the close relationship between Treasury yields and the broad stock index, this is limiting the S&P 500’s rally potential.
Dynamics of S&P 500 and Treasury yields
Thus, the stock index’s future trend will depend on the US domestic data, primarily on inflation. Therefore, on the eve of the US consumer prices report for October, the movement of the broad stock index may stop unless investors are scared by Jerome Powell’s tone. Dissatisfied with weakening financial conditions, the Fed Chairman may hint at the possibility of raising federal funds rates in the future.
In my opinion, if the S&P 500 passes the test of the Fed’s hawkish tone and has a new momentum amid a slowdown in the US inflation, it will continue the rally towards 4500. Bad news from the US economy will remain good news for the stock market, as in such a scenario, Treasury yields will fall, and the chances of a federal funds rate cut will increase. In this regard, the implementation of Bloomberg experts’ forecast of a slowdown in GDP from 4.9% to 0.9% in the fourth quarter is an additional reason to buy the stock index.
Weekly S&P 500 trading plan
I recommend holding up long positions entered at 4177. If the price fails to go above 4400, it could start a descending correction, and one could enter new purchases.
Price chart of SPX in real time mode
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