Investors are preparing for the Federal Open Market Committee (FOMC) scheduled for Wednesday, May 3-4, 2022. Stocks have been sold down to a level that may have discounted some of the bad news most expect. Is it enough?

Could a couple of days around May 4th see a re-test of this year’s lows? It depends on how hawkish the Fed is prepared to be. Expectations are now for a 50-basis point hike in the week ahead, and two more in the next two monthly meetings. The markets are also expecting a substantial reduction in the Fed’s multi-trillion-dollar balance sheet.

That asset reduction is where most of the questions remain unanswered. Exactly how much and how fast will that reduction be? There are plenty of forecasts indicating that the Fed could be much more bearish than many expect. And a few (very few) analysts are on the other side of that bet, predicting the Fed will most likely make a one-and-done type hike in interest rates.

So far, the Fed has managed to raise the yield on the U.S. Treasury bond from 1.5% to almost 3% (equal to three 50-basis point hikes) without lifting a finger. The Fed knows what I do–that many professional investors have never experienced a rising interest rate environment. As such, Fed members have been making a series of coordinated hawkish statements on an almost daily basis. By yelling “Boo,” which has scared the children, the Fed is manipulating rates up by simply talking the talk. On May 3-4,  the Fed will begin to walk the walk.

In the throes of earnings results and their fear of the Fed, few investors noticed or cared that the first quarter GDP data showed a decline of 1.4% versus a 6.9% growth pace in the final quarter of 2021. Economists were predicting a gain of 1.1%.

The war in Ukraine, the inflation rate, and the ongoing pandemic were blamed, along with a decrease in business inventory investment. The surprise short fall was written off by President Joe Biden and described in a statement as being “affected by technical factors.” That may be so, but let’s remember that two straight quarters of declining growth is a commonly used definition of a recession.  Investors are already concerned that the Fed’s tightening policies will precipitate a recession in the months ahead. This data does nothing to alleviate those fears.

Net exports also dropped by over 3%. I suspect the continued strength of the dollar is behind this poor performance. Currencies like the Japanese Yen and the Chinese Yuan have plummeted this week. For investors, remember that the stronger the dollar, the worse the prospects for many American companies in the S&P 500 Index. Their goods become more expensive to foreigners. Overseas sales represent a good deal of the profits for many of these companies.

Investors, while remaining skittish over the prospects for next week, were also distracted by earnings results from seven of the world’s mega stocks. Facebook (Meta) beat on profits but missed on revenues and forward guidance. The stock jumped almost 15% on the fact that it could have been worse. I would call it a relief rally since the stock price has been decimated this year. Alphabet missed and the stock was pummeled, but Microsoft beat and was rewarded.  Netflix and Tesla have already reported. Tesla scored big on the upside, while Netflix missed badly. Amazon and Apple reported on Thursday night. Amazon disappointed as its core e-commerce business appears to be slowing and forward guidance was weak. And while Apple beat estimates, it also warned that the Chinese Zero-COVID policy could mean an $8 billion hit to sales in the coming quarter.

These stocks are so important to the overall markets that the price action of any one of them has the power to move markets up or down dramatically. Three out of seven of these companies reported okay-to-fair results, which managed to prop up the markets this week. But now that those results are in the rear-view mirror, what next?

As readers know, I worry that the Fed might trigger a further sell-off in the stock market this coming week. So far, the markets have not declined to a point where I feel that whatever the Fed might do would already be discounted by a market decline before the FOMC meeting. I believe we could retest or even break the lows made thus far in 2022 if the Fed does something that spooks investors. I would buy that dip.