Stocks: The Only Event That Matters Next Week


Investors globally -- whether in stock or bond markets -- are hotly anticipating next week's two-day meeting of the Federal Open Market Committee, the Federal Reserve's rate-setting group. The stakes are high, as the outcome could set the tone for the market at least until the end-of-July date at which the FOMC reconvenes.

Since May 22, the market has been flustered at the notion that the Fed could begin to curtail its open-ended $85 billion-per-month bond-buying program later this year, perhaps as early as this month. On that day, Fed Chairman Ben Bernanke told Congress the central bank could decide to reduce the program at "one of its next few meetings." The same day, the minutes of the FOMC's May-June meeting were released and contained the following snippet:

A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth.

The effect on the stock market has been unmistakable:

^GSPC Chart
^GSPC Chart

^GSPC data by YCharts

The S&P 500 peaked on May 21 (the narrower, price-weighted Dow Jones Industrial Average peaked later, on May 28.) Volatility, as measured by the VIX , has risen significantly.

Unmistakable, certainly. Overdone? Very likely.

For one thing, it's not clear who the "number of participants" in the quote above refer to; it could well be non-voting participants. Second, these statements are contingent on numerous factors, as the second part of the quote makes clear:

[H]owever, views differed about what evidence would be necessary and the likelihood of that outcome. One participant preferred to begin decreasing the rate of purchases immediately, while another participant preferred to add more monetary accommodation at the current meeting.

Finally, some key data available since May 22 do not support a tightening in monetary policy right now; in particular, the core Personal Consumption Expenditures index (which excludes food and energy), the Fed's preferred gauge of inflation, registered in April its lowest annual increase since its inception in 1959, at 1.05%!

This week's FOMC meeting, which begins on Tuesday, will include a summary of the Fed's economic projections and, crucially, a press conference by Bernanke. As I see it, it's the perfect opportunity for Mr. Chairman to reassure investors that they are jumping the gun and that a slowing in the pace of the Fed's bond-buying is not imminent. At that point, the market could focus on stock fundamentals a little bit -- at least until Fed-watching takes center stage again.

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Fool contributor Alex Dumortier, CFA, has no position in any stocks mentioned; you can follow him on LinkedIn. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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