US Stock Market: Investors Take Early Breather Ahead of Next Week’s Fed Decisions

If you’re looking for a reason for the across the board reversals on Tuesday, look no further than position-trimming ahead of next week’s two-day Federal Reserve policy meeting.
James Hyerczyk
US Stock Market

The major U.S. stock indexes closed lower on Tuesday after giving back early gains. The markets had been on a tear since the start of the month, fueled by dovish comments from Federal Reserve Chairman Jerome Powell on June 4, which opened the door to a sooner-than-expected interest rate cut.

The price action suggests the rally just ran out of buyers, giving long investors a reason to start booking profits following the week-long rally. The Dow snapped a six-day winning streak, while the NASDAQ Composite and S&P 500 ended five straight days of higher closes.

In the cash market, the benchmark S&P 500 Index settled at 2885.72, down 1.01 or -0.04%. The blue chip Dow Jones Industrial Average finished at 26048.51, down 14.17 or -0.06% and the tech-based NASDAQ Composite closed at 7822.57, down 0.60 or -0.01%.

If you’re looking for a reason for the across the board reversals on Tuesday, look no further than position-trimming ahead of next week’s two-day Federal Reserve policy meeting. Central bank policymakers will make an interest rate decision, issue a monetary policy statement, new forecasts and hold a press conference. This news may not be rattling investors, but it may be just enough to encourage them to lighten up on the long side.

The price action also suggests investors may not be willing to chase this market higher this close to all-time highs especially due to the uncertainty over U.S.-China trade relations and the timing of a Fed rate cut. While I don’t expect to see last week’s low taken out over the near-term, there is room for a short-term correction of perhaps two to three days.

Given that sentiment was negative in May, and may have shifted a little in June, we’re probably looking at a rangebound trade as we head into the start of the Fed meeting and the major announcements.

Essentially, I will not be surprised by a choppy, two-sided trade. Since early May investors have had to shift gears several times so to be only 2.4% away from a new all-time high in the benchmark S&P 500 Index is not a bad position to be in at this time.

May started with investors pricing in a U.S.-China trade deal. Shortly thereafter, the wheels fell off after President Trump announced new tariffs against China and China retaliated against the U.S. Most importantly, both sides walked away from the negotiation table. Furthermore, Treasury yields plunged to multi-year lows and the yield curve inverted, encouraging some analysts to predict a recession.

June started with the U.S. threatening a 5% tariff on Mexico if it didn’t do something about excessive Central American migration. However, Powell’s the Fed will “act as appropriate to sustain the expansion” remark stopped the sell-off in its tracks and help generate an impressive reversal to the upside. In the meantime, the U.S. and Mexico were able to work out a deal, preventing the imposition of the tariffs.

That being said, if investors want to take a breather ahead of the Fed announcements then so be it.

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