(Bloomberg) — Stocks drifted near all-time highs ahead of the Federal Reserve decision, with traders split on the size of an interest-rate cut.
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The S&P 500 closed little changed after briefly crossing the threshold of a record amid an increase in US retail sales. Economically sensitive industries once again outperformed tech. Treasury yields edged up, with shorter maturities leading the move. The market-implied odds the Fed announces a 50-basis-point reduction on Wednesday were around 55%.
For several market observers, perhaps the most-important aspect of what happens may be the investor reaction. Could a 25 basis-point reduction leave traders worried the Fed is behind the curve? Could a 50 basis-point move spook markets that the Fed must know the economy is in dire shape? Or will investors be reassured that, whatever the Fed does, Chair Jerome Powell is on top of the situation?
“It’s rare under the Powell Fed for markets to be this ‘up in the air’ on what exactly the Fed will do with just one day to go before the decision,” according to Bespoke Investment Group strategists. “Although maybe the Fed is happy with the market being 100% sure that we’ll at least get a cut.”
A survey conducted by 22V Research showed investors who expect a 25 basis-point reduction are split on whether that cut would deliver a “risk-on” or “risk-off” reaction. Meantime, those betting on 50 basis points think a smaller Fed move would be “risk-off.”
The S&P 500 closed near 5,635. The Nasdaq 100 and Dow Jones Industrial Average were little changed. The Russell 2000 of small firms added 0.7%. Treasury 10-year yields rose two basis points to 3.64%. The dollar gained.
While the market has typically done well on Fed Days when rates have been cut, performance in the week after the first rate cut of a new easing cycle has been pretty weak, according to Bespoke.
The S&P 500 has averaged a drop of 0.56% from the close on the day before the first rate cut through one week later, while eight of 10 sectors have averaged declines as well. Financials and…
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