Stocks: Getting a Fix on the Fed

S&P looks at what's at stake for the market as Bernanke & Co. prepare to kick off their widely anticipated Sept. 18 policy meeting

by Sam Stovall From Standard & Poor's Equity Research

Investors are walking on eggshells as they await the Sept. 18 decision by Federal Reserve policymakers. Will Ben Bernanke & Co. leave the target Fed funds rate at 5.25%, lower it by 25 basis points, or go even further by cutting it 50 basis points (one-half of 1%)? We believe the Fed will take the middle ground and cut by 25 basis points, likely doing the same thing at its Oct. 30-31 meeting and again at the Dec. 11 or Jan. 29-30, 2008, FOMC meetings. We believe that most Fed watchers are also eyeing a quarter-point cut on Sept. 18 and that this likely event has largely been built into U.S. equity prices.

Since the Aug. 15 closing low of 1406 for the Standard & Poor's 500-stock index, two days before the Fed's half-point cut in the discount rate, all of S&P's U.S. equity market indexes, along with the 10 sectors in the S&P 500, have advanced from 3.5% to 10.5%, recovering much of what was lost in the July 19-Aug. 15 pullback of 9.4% for the S&P 500. All indexes remain below their July 19 highs, however.

Sector leadership has indicated that a decidedly defensive tone has been adopted by investors, as the Consumer Staples, Telecom Services, and Health Care sectors have led on a relative basis, while Consumer Discretionary, Financials, and Materials have been hit the hardest. S&P's Equity Strategy Group continues to recommend the Energy and Health Care sectors.

Source: Standard & Poor's Equity Research