As bear market looms, battered Wall St seeks elusive 'Fed put'
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[May 21, 2022] By
David Randall
NEW YORK (Reuters) -The Federal Reserve's
determination to raise interest rates until it squashes the highest
inflation in decades is darkening the outlook across Wall Street, as
U.S. stocks stand on the cusp of a bear market and warnings of a
recession grow louder.
At issue is the so-called Fed put, or investors’ belief that the Fed
will take action if stocks fall too deeply, even though it has no
mandate to maintain asset prices. One oft-cited example of the
phenomenon, which is named after a hedging derivative used to protect
against market falls, occurred when the Fed halted a rate hiking cycle
in early 2019 after a stock market tantrum.
This time around, the Fed’s insistence that it will raise rates as high
as needed to tame surging inflation has bolstered the argument that
policymakers will be less sensitive to market volatility - threatening
more pain for investors.
A recent survey by BofA Global Research showed fund managers now expect
the Fed to step in at 3,529 on the S&P 500, compared with expectations
of 3,700 in February. Such a drop would constitute a 26% decline from
the S&P’s Jan. 3 closing high.
![](http://archives.lincolndailynews.com/2022/May/21/images/ads/current/peasley_sda_PROM_2022.png)
The index, which closed Friday at 3,901.36, is already down almost 19%
from that high this year on an intraday basis - close to the 20% decline
that would confirm a bear market, according to some definitions. [.N]
"The Fed has bigger fish to fry and that's the inflation problem," said
Phil Orlando, chief equity market strategist at Federated Hermes, who is
increasing his cash levels. "The 'Fed put' is kaput until the central
bank is confident that they're no longer behind the curve."
As a result, some investors are digging in for a long slog. BofA’s
survey showed cash allocations at a two-decade high, while bets against
technology stocks stand at their highest since 2006.
Strategists at Goldman Sachs, meanwhile, earlier this week published a
“Recession manual for US equities” in response to client inquiries on
how stocks will perform in a downturn. Barclays analysts said that
numerous negative near-term catalysts mean the risks for stocks “remain
firmly stacked to the downside."
The S&P 500 closed broadly unchanged on Friday, reversing a sharp
intraday decline that had briefly put it into bear market territory. The
index marked its seventh straight week of losses, the longest streak
since 2001.
Jason England, global bonds portfolio manager at Janus Henderson
Investors, believes the index needs to fall at least another 15% for the
Fed to slow its tightening, given that unprecedented monetary policy
support helped stocks more than double from their March 2020 lows.
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![](../images/052122pics/busine15.jpg)
Traders work on the floor of the New York Stock Exchange (NYSE) in
New York City, U.S., March 21, 2022. REUTERS/Brendan McDermid
![](http://archives.lincolndailynews.com/2022/May/21/images/ads/current/werth_sda_PROM_2022.png)
"The Fed is being very clear that there will be some pain ahead," he said.
The Fed has already raised rates by 75 basis points and is expected to tighten
monetary policy by 193 basis points this year. [/FEDWATCH] Investors will get
more insight into the central bank's thinking when minutes from its last meeting
are released on May 25.
2018 REDUX?
Some worry the Fed risks exacerbating volatility if it does not heed possible
danger signs from asset prices. Analysts at the Institute of International
Finance said stocks may be subject to the same type of selling that rocked
markets in late 2018, when many investors believed the Fed tightened monetary
policy too far.
“In the past, rising uncertainty and mounting recession risk have had important
effects on investor psychology, making markets less tolerant of monetary policy
tightening that is seen as no longer warranted,” IIF analysts wrote on Thursday.
“The risk of a similar market tantrum (to 2018) is rising again now as markets
fret about global recession.”
There have been signs of resilient sentiment among investors. For example, the
Cboe Volatility Index, known as Wall Street’s fear gauge, is elevated but below
levels it reached during previous major selloffs.
And the ARK Innovation Fund [ARKK.K], which became emblematic of the pandemic
rally, has brought in net positive inflows of $977 million over the last six
weeks, Lipper data showed. The fund is down 57% in 2022.
While some investors say those are signals that markets are yet to bottom,
others are more hopeful.
Terri Spath, chief investment officer at Zuma Wealth, believes some investors
are re-entering parts of the stock market that have suffered outsized losses.
"The Fed is already seeing signs that they won't be needed as a buyer of last
resort," she said.
Analysts at Deutsche Bank are less optimistic.
![](http://archives.lincolndailynews.com/2022/May/21/images/ads/current/charrons_bch_2022.png)
"The Fed having badly erred on the side of excess inflation in 2020/21, cannot
afford to make the same mistake twice - which favors more financial conditions
tightening, and ongoing high (volatility) panicky markets," they wrote.
(Reporting by David Randall in New YorkEditing by Ira Iosebashvili and Matthew
Lewis)
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