The U.S. stock market is facing a critical week as the major indices are heading towards correction territory. Bulls are hoping seasonality comes into play, as stocks tend to rally following midterm elections and into the holiday season. They are also looking forward to corporate share buybacks resuming as the blackout period begins to fade.
While optimism still burns bright in the eyes of the Bulls, they are forgetting about the Fed. As of October, the Federal Reserve has increased their balance sheet unwinding program, or Quantitative Tightening, to its maximum level. The Fed has also been raising the Federal Funds rate with the expectation of another hike in December.
Should the stock market fail to rally next week, it will set up the increased probability of further declines. The seasonal trends may not be strong enough to overcome the Fed’s tightening and a slowing economy. Next week should be interesting.