Stock Market Outlook: What to Watch in the Week Ahead

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What can we expect from the stock market in the coming days? Investors will be looking for any hints about the Federal Reserve’s next moves in the February inflation report, due Tuesday.

“It’s all about the Fed and inflation,” Amit Sinha, head of multi asset design at Voya Investment Management, says about the week ahead. “The markets will be calibrating their confidence on the path of rate increases for the rest of 2023.”

This week, Fed Chair Jerome Powell spooked the markets during his testimony before the House Financial Services Committee. Powell indicated that the U.S. central banking system is ready to react to continuing economic strength by raising the benchmark federal funds rate higher than it had initially expected — and possibly up the pace of rate hikes.

The latest data on January’s job vacancies and February’s job growth and unemployment showed that the labor market is still tight. Looking forward, here’s what market watchers will have their eyes on the week of March 13:

New inflation data

On Tuesday, the Bureau of Labor Statistics will release its latest Consumer Price Index (CPI) report, which will show how the prices of goods and services — from food and gas to cars and airline fares — changed in February. It’s often referred to as the “inflation report.”

The Fed has been hiking interest rates for about about a year in an effort to tamp down inflation, but those hikes have also been weighing on the price of financial assets, like stocks and bonds. If the next inflation report shows that prices are staying stubbornly high, there’s a good chance the Fed will increase interest rates again later in March — a move that would disappoint many investors.

Even if the data is somewhat ambiguous, Sinha says the Fed will likely lean towards announcing more rate hikes.

“Powell has stated that it is easier for the Fed to act to stabilize a slowing economy rather than controlling runaway inflation,” he adds. “Therefore, if inflation data provides a coin toss, the Fed is likely to remain on the side of tightening rather than pausing [or] easing.”

Investors’ reactions to economic indicators

Liz Young, head of investment strategy at SoFi, said the current market environment feels like a version of the children’s game “red light, green light,” with the markets quick to react to every piece of economic data that could possibly give insight into the Fed’s decisions.

“The most recent market-moving event was Fed Chair Powell’s testimony to Congress, which sent fed funds futures (the market’s expectation for where the fed funds rate will be) up in quick fashion,” Young wrote in a blog post Thursday. “Red light.”

In other words, be prepared for continued volatility as investors digest economic data and what it may mean for their portfolios ahead of the next Federal Open Market Committee meeting later in March, when the Fed will announce the next target for interest rates.

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