SP500 Record Hinges on FOMC Mins

The latest rally in the US benchmark index will face a challenge to start the new year as investors look at the FOMC minutes to understand the Fed's pivot better.

Heading Towards New Records?

The SP500 index recently achieved strong gains, logging its ninth consecutive weekly increase - the longest streak since 2004. After growing 24% for the entire year, it came within points shy of its record of 4,817 set on January 3, 2022. Analysts note that the prevailing momentum remains favourable as the new year begins, with keen interest in whether the benchmark surpasses the threshold it has not been able to crack in two years.

Meanwhile, the Nasdaq Composite surged 43% over the course of 2021. Whether the S&P 500 can catch up may hinge on this week's important economic announcements, starting with the release of the FOMC meeting minutes. At their latest policy session, Committee members opted to maintain the hold while opening the door to potential easing in 2024. However, markets interpret signals as pointing to more rate cuts than the three pencilled in by the dot-plot matrix. Investors will then scrutinise the minutes for any additional context on how compliant policymakers feel about adjusting rates downward.

Holding the Line or Easing?

When the FOMC reconvenes in 2024, its composition will differ due to the annual rotation of members. More centrist voters are anticipated to replace some of the more extreme hawks and doves. This transition could influence the market interpretation of the minutes. For instance, the remarks of Austan Goolsbee and Neel Kashkari - viewed as the most dovish and hawkish members, respectively - may carry less weight as both will have rotated off the Committee.

Notably, Fed Chair Jerome Powell's post-meeting press conference was interpreted as more dovish than expected on balance. In part, the recent equity gains reflect markets pricing in as many as six rate cuts versus the FOMC's three. However, the minutes also risk providing a reality check if members emphasise inflation persisting above target or ongoing tightness in labour markets. With the SP500 rally now extended, the potential for a deeper correction increases - and the minutes could catalyse such a pullback alongside major data releases later this week.

Long-Term Double-Top in Focus

The SP500 might have formed a double-top pattern shy of its record high, potentially leading to a pullback towards 4600, if not a full-blown reversal, eyeing at least 4330 initially and 4100 post-breakdown. A pullback could be followed by a flag pattern or other consolidation pattern, paving the way for a continuation of the upward trend and record highs towards 5000. If 4690 holds firm and prices continue higher, a short-term double-top formation may suggest upward momentum losing steam. If the price breaks past that peak, it may signal renewed buying interest and a resumption of the bullish trend.

Source: SpreadEx/ SPX 500

Key Takeaways

The SP500 index came close to reaching an all-time high record at the end of 2023 but fell short. The minutes from the latest FOMC meeting this week could provide clues as to whether the Fed will continue its hard stance or pivot to the market's dovishness. The composition of the FOMC is set to change in 2024, which could impact how the minutes are interpreted. While the stock market rally has been extended, the release of major economic data and the FOMC minutes this week could trigger a market correction.