Options strategists have warned that investors may be underestimating the potential market turbulence that could arise from the Federal Reserve’s economic symposium at Jackson Hole, Wyoming. This could leave them vulnerable to a surprise hawkish message from Fed Chair Jerome Powell. The options market is currently pricing in a 0.9% move in the S&P 500 Index by the end of trading on Friday, when Powell is scheduled to give his address on monetary policy. However, some strategists believe that this outlook may not be cautious enough, especially considering the reaction to Powell’s speech at Jackson Hole last year, which caused a 3.4% drop in the S&P 500. With investors sitting on significant gains in stocks and bond yields rising, they may be caught off guard if a hawkish Powell triggers a sell-off in risky assets. Analysts at Bank of America also believe that markets may be ill-prepared for a hawkish message, as recent strength in U.S. economic data could increase concerns about inflation. While Fed chairs’ Jackson Hole speeches have not typically been major market movers in recent years, there may be greater potential for market gyrations this time around. The S&P 500 has gained over 15% year-to-date, but the rally has stumbled this month due to rising Treasury yields. The pressure may be on Powell to reinforce his stance on rates to avoid giving the impression that the battle against inflation has already been won. This year’s symposium also comes at a time when various asset classes are more vulnerable to outsized moves following the event. However, there is no guarantee that Powell’s message will be starkly hawkish, as Treasury yields suggest that the Fed’s “higher for longer” message may be resonating with some investors. While there are signs that investors may not be completely unprepared for market volatility, the Cboe Volatility Index remains above recent lows. Overall, some experts believe that this year’s event has been hyped up and Powell may have less of an impact compared to last year.
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