If the market needs something to worry about, the Federal Reserve this week — and indeed for the rest of the year — just might be the catalyst.
In fact, a mistake from the Fed might be the only thing investors really fear right now in this, the eighth year of the second-longest bull run ever. The worry is that the central bank might make the same mistake it did in 1994 when it tightened policy at a vulnerable time for the economy, triggering the worst year for bonds since the late 1920s and the bankruptcy of Orange County, California.
Nobody knows what this round of modest Fed aggressiveness will yield. But it comes at a time when the U.S. recovery feels fragile, inflation is nowhere to be found, and both the stock market rally and the broader economic recovery are awfully long in the tooth.
For the Fed, getting the timing right for policy normalization, after so many years of cheap money and bountiful liquidity, will be critical.
"They've left themselves with very little flexibility to respond to any negativity," said Peter Boockvar, chief market analyst at The Lindsey Group. "It's so easy to cut rates and print money. That's great, everyone has a party during that. Trying to determine when to take that away is always the most difficult part."
Investors are worried the Fed could get that part wrong.
In a recent Bank of America Merrill Lynch fund manager survey, investing pros listed a Fed mistake as their second-biggest fear — right after a bond market meltdown, two events that likely would be intertwined.