Just one month ago, most economists expected the Federal Reserve to leave interest rates unchanged at its meeting this week. As of Monday, the futures market had priced in a 90% probability of a quarter-point rate hike. If you're considering buying (or continuing to buy) the Vanguard S&P 500 ETF (NYSEMKT: VOO) or other U.S. large-cap equities, the question right now is, should you buy the index before the Fed announces its rate decision or wait to see what happens first?
This Rare Signal Is Flashing Again. In 2009, a "Double Down" signal flashed for a little-known chipmaker called Nvidia. For the first time in years, that same "Total Conviction" signal is flashing for a company 1/100th the size of Nvidia.
Continue » Personally, I would continue buying. But not because I think stocks will rally on Wednesday afternoon. Hotter-than-expected inflation data and oil prices that have pushed past $100 per barrel are fueling the expectation for rate hikes.
The year-over-year inflation rate in September was 3.4% and could come in higher in September if oil prices remain elevated. At this point, the rate hike itself probably isn't the biggest threat to stocks. Investors already expect it to happen.
The real key will be the Fed's outlook and new dot plot report, showing where Federal Open Market Committee (FOMC) members expect rates to be in the future. That should give some indication of whether the central bank views this as a one-off rate hike or the beginning of an extended rate-hiking cycle. Fed Chair Kevin Warsh has consistently been reluctant to offer any forward guidance.
But the futures market thinks it's the latter. It's currently pricing in a roughly 60% chance of 75 basis points of rate hikes or more by the March 2027 meeting. That's the potentially bigger headwind for the S&P 500 (SNPINDEX: ^GSPC).
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