A possible interest rate hike by US Federal Reserve on Wednesday could result in a correction in the S&P 500 as lower corporate margins weigh on profit outlooks and markets prepare for a tightening policy, Bloomberg News reported citing Macro Risk Advisors LLC.
The S&P 500 has fell around 1% in September so far, its weakest month historically, amid concerns over higher energy costs and latest inflation data that has pushed US 10-year Treasury yields over 5% for the first time since 2023. Following this development, traders expect a quarter point rate increase by Fed Chairman Kevin Warsh on Wednesday, with CME's FedWatch tool estimating more than 92% chance of an interest-rate hike.
A rate hike on Wednesday could result in more pain, the news portal reported citing Dean Curnutt, CEO and founder of Macro Risk Advisors.
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“We expect an 8-10% pullback in S&P with a potential second leg in December,” it further quoted Curnutt's note to clients. A hike in interest rates will “compress margins in companies that cannot pass costs through” and post a volatility shock into a market that is not prepared for it, it added.
According to Curnutt, the situation is similar to what investors witnessed in 2018, when the S&P 500 surged in September and then tanked 10% from October to November. In the same year, Curnutt cautioned , “The Santa Claus rally did not come” as the market crashed further more in December, ultimately tumbling nearly 20% from its peak.
Looking at the history, “a defensive posture is the correct approach,” he was quoted as saying. Curnutt expects another downturn this year, similar to 2018, when the market is expected to take another leg lower in December in response to multiple Fed hikes “into a K-shaped, low-churn economy.”
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