US equities subject to losses until readiness to stop QT declared by Fed

There are signs of easing inflationary pressures and moderating growth but not enough to prompt a shift by the Fed yet. The Fed is expected to raise interest rates by another 0.5 percentage point in June.

The stock market sell-off will end when the Fed signals it’s done tightening monetary policy, Goldman Sachs says. A sign from the Federal Reserve that policymakers are wrapping up work on tightening monetary policy will be needed to stop the sell-off in US stocks, Goldman Sachs said Tuesday.

Stocks have been bleeding in value as Fed’s Chair Jerome Powell indicated it will be on an aggressive path in raising interest rates to tame hot inflation. Investors are pricing in expectations that a fast pace of hefty rate hikes will pull the US economy into a recession.

By taking history as a guide, in order for equities to convincingly bottom, this monetary tightening induced contraction is most likely to end when the Fed itself shifts. The large-cap SP 500 index dropped on Tuesday, once again moving toward entering a bear market after managing to escape late last week. The tech-rich Nasdaq Composite deepened its position in a bear market as it was veering toward a 3% loss in Tuesday’s action.

The Fed is expected to raise its benchmark rates by another 50 basis points at the June 14-15. The Federal Open Market Committee has increased rates by 75 basis points since March, bringing them to a range between 0.75% and 1%.

It may be that the market needs to see signs of the inflation deceleration that our US economists expect in the second half of the year in order to see sustained relief. The monetary tightening in financial conditions so far this year is believed to be in the ballpark of what is needed for the Fed to reach its policy goals, as Fed aims for an inflation average of 2%.

Inflation measured by the Consumer Price Index climbed 8.3% in the year through April, a slight pullback from the 8.5% rate in March that marked a 41-year high. Meanwhile, gross domestic product in the first quarter contracted by 1.4%.

But investors are not expected to receive a clear signal from monetary policy makers until there are stronger indications that economic growth is moderating and that inflationary pressures are cooling. There are some signs of each now, but neither is decisive.