In this article:

• Stock market awaits Federal Reserve speech
• More fiscal tightening ahead for economy?
• Waiting for market to find its footing

The stock market appears to be winding up like a wooden top and the Federal Reserve (Fed) may send it spinning wildly on Friday morning.

Fed Chairman Jerome Powell is set to speak at 9 a.m. Central on Friday during the Federal Reserve Bank of Kansas City Economic Policy Symposium in Jackson Hole, Wyo.

All eyes have focused this week on what will come out of this multi-day event, particularly Fed plans for raising benchmark interest rates.

Everyone wants to know if this is setting up a market crash.

Stock market awaits Federal Reserve decisions

What happens after Friday?

“At this point, I don’t think the market is going to crash.”

John Carter, Founder of Simpler Trading

He pointed out recent comparisons of the current market environment to the 2008 housing and financial crash, and the market and economy today are no comparison.

“2008 was the world financial system imploding on so many levels,” said John, author of Mastering The Trade. “That’s not what we have here. (Markets) got inflated and bloated, and now they’re coming home to roost.”

Market internal signals in recent weeks have shown the market going from a swing high to a swing low, and then rallying into an extended level. This was followed by the pullback to start this week.

Market set to pivot on Fed news?

As previously shared in Simpler Insights, John pointed to the Fed event this week as a pivotal time in the stock market. He prefaced the upcoming event as a culmination point from market action earlier this year.

In the first half of this year, John explained, the U.S. dollar was going up, U.S. Treasury bonds were cratering (longer term rates were going up), and commodities (oil, wheat) were going up. For consumers, mortgage rates have climbed along with prices of staple needs such as energy and food.

“If the dollar is going up, that is fiscal tightening happening. This was the fastest fiscal tightening conditions in history.”

John Carter, Founder of Simpler Trading

The Fed raising interest rates, part of the fiscal tightening, is designed to keep economic growth in check to battle inflation. John believes the Jackson Hole symposium is a time for the Fed to figure out how to frame future actions to curtail inflation.

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Fed faces tough choices this week

The Fed is facing harsh choices that are sure to affect the stock market.

“They could come out based on what they’re seeing and say, ‘You know what? Inflation is a menace and we need to actually get more aggressive than we originally planned,’” John said. “In that case stocks would crater.”

“The other extreme is, ‘Alright, this looks good and I think we’re done,’” he said.

John doesn’t expect the Fed to go to the extreme either way, but possibly act along the lines of a “happy middle.”

He pointed to new home sales data released Tuesday showing July sales were down more than 12.5%.

While this is bad news for the housing market, it may be “happy middle” news for the Fed. Lower housing data indicates real estate – a key economic growth factor – is slowing and this is what the Fed wants – slower growth to lower inflation.

Earlier Fed interest rate hikes this year have also affected the housing market. The average rate of a 30-year fixed mortgage – holding just above 3% in the first quarter – spiked to almost 6% in June. That number has since fallen to just above 5% earlier this month.

Across the price spectrum in the housing market, buyers have lost interest (at a 22-year low in June) in home purchases with the higher mortgage rates.

“The Fed needs to crush (consumer) demand in order to crush inflation. Demand for real estate is a big part of that.”

John Carter, Founder of Simpler Trading

John highlighted that the Fed could look at this recent housing data and determine there is no need to be hyper aggressive in raising benchmark interest rates. The Fed could instead lean into that “happy middle” by staying the course for raising interest rates no higher than the expected 75 basis points in September.

The Fed could be less hawkish this week while continuing to evaluate market and economic data as it unfolds.

“Generally, I would say that would be a positive for the markets,” John said.

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Market expected to cross new bridge this week

Could the market pullback earlier this week still lead to a push further down? Yes, John said, but no one knows to what extent.

“It depends on what they say in Wyoming, but I think we’re going to find our footing this week,” John said.

He anticipates that footing will lead to the stock market moving lower in the near term.

“I believe we’re going to put in a low, and believe it or not, I think we can retest these (recent) highs or even break through these highs into mid- to late September,” John said.

He will watch to see if the Chicago Board Of Exchange (CBOE) Volatility Index (VIX) reverts back down to 20 in this time frame. This could possibly usher in an even steeper decline off anticipated new highs.

The VIX, or “fear index,” closed at 22.91 today, down 5.35%. This is a gauge of market volatility over the next 30 days, and a level above 20 is considered high volatility – more fear in the market.

John made note that there is no guarantee the market will play out in this scenario, as the Fed event in Jackson Hole could send the market into a whirlwind or tailspin.

“We’ll cross that bridge when we get there,” John said.