Wall Street: S&P 500 enters correction territory and what to expect from FOMC meeting

S&P 500 enters correction territory

With two sessions left to go, the benchmark S&P 500 is down 3.98% in October and has officially entered correction territory after recording falls of 4.87% in September and 1.77% in August. The last time the S&P 500 fell as heavily in October as it has this year was back in 2018 when it fell 6.94%, a move that was the encore to the main event—a stomach-churning 15% intra-month fall in December.

Historical context and the Fed's role

Back then, like now, the Fed was in the latter stages of a tightening cycle, which coincided with then-President Donald Trump's trade war with China. Concerns over slowing growth and a tumbling stock market were the catalysts for a dovish Fed reversal in the final days of 2018, sparking a sharp rally in early 2019.

Why do I mention this?

The Fed Chair back in 2018 was Jerome Powell, the current Fed Chair. While today's backdrop of higher rates and geopolitical challenges is similar in some respects to 2018, there is one noticeable difference. As we have highlighted in recent weeks, the Fed has already pivoted away from its hawkish bias to adopt a more cautious tone, perhaps in recognition of the events of 2018.

Upcoming FOMC meeting

Date: Thursday, 2 November at 5 am AEDT

To recap, at its meeting in September, the Fed elected to maintain the target range for the Federal Funds rate at 5.25%-5.50% and retained its tightening bias. "The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals."

In recent weeks, several Fed speakers, including Fed Chair Powell, have sounded more cautious and noted that the rise in longer-term bond yields and tightening financial conditions have reduced the need for further monetary policy tightening. As such, the market widely expects the FOMC to keep the Federal Funds target rate unchanged at 5.25%-5.50% in November.

With no Summary of Economic Projections (SEP) or dot plots, the focus will be on the accompanying statement.

Interest rate outlook

The more cautious shift in tone noted in recent Fed commentary will likely be reflected in softened forward guidance. In recognition of a series of robust economic data, the statement will likely reiterate that interest rates need to remain higher for longer.

S&P 500 technical analysis

The pullback we had been forecasting since July, which we reaffirmed in September, last week broke through crucial technical support at 4200. As a result, we have moved to a neutral bias, given the risks of a deeper decline towards 3900.

For a more optimistic outlook to emerge, the S&P 500 needs to reclaim the 200-day moving average at 4264 and maintain support in the 4300 area on a sustained basis.

S&P 500 daily chart

Nasdaq technical analysis

As noted in recent reports, the pullback in the Nasdaq (until late last week) had fallen short of the wave equality pullback target in the 14,200 area, leaving uncertainty as to whether the Nasdaq had completed its correction or was missing a final leg lower before the uptrend resumed.

Following the sell-off at the end of last week, the Nasdaq has now reached and tentatively bounced from the 14,200/14,000 support zone. Provided it stays above support at 14,200/14,000, we cannot rule out a retest of trend channel resistance at 15,450, originating from the July high of 16,062.

Nasdaq daily chart

• _{TradingView: the figures stated are as of 30 October 2023. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}