The Stock Market: It’s Still About The Fed

Financial volatility

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Like it or not, when people talk about the stock market these days, it still boils down to what the Federal Reserve is going to do.

Read action records in the stock market this week, or, last week, and you get a suggestion that the performance of financial institutions is behind the rise in the stock market this week, or, that better than expected GDP growth in the third quarter showed that the economy is doing better than many expected.

But immediately after the reasons are given, attention turns to the Federal Reserve.

The Federal Reserve is holding a meeting of its Federal Open Market Committee, the Fed’s policymaking group, on November 1st and 2nd.

Almost everyone expects the FOMC to raise its interest rate by 75 basis points, bringing the effective federal funds rate up to 3.83 percent.

Big debate right now?

What the Federal Reserve will do at the December FOMC meeting.

People were expecting another rate hike of 75 basis points, but last week there was word that the Fed might only raise its benchmark rate by just 50 basis points.

This would mean that after five consecutive hikes of 75 basis points, the Fed would back down from such a strong move at each meeting.

As word spreads through the investment community, a sizable group of “investors” are talking about a “pivot” in the Federal Reserve’s monetary policy.

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Such a move is considered by many investors to be a “big” adjustment like this one.

There is no evidence for that. There are no specifics about such a “pivot”.

As far as I can read the market, the judgment of investors is the judgment of Fed Chairman Jerome Powell.

Chairman Powell guided the Federal Reserve through the spread of the Covid-19 pandemic, the subsequent economic recession, supply chain issues and other disrupted sectors or markets.

But Mr. Powell has always led the way in which the Fed erred on the side of monetary ease.

This is one reason why so many believe that the Fed’s plans to stop inflation do not remove enough of the liquidity that Mr. Powell and the Fed have pumped into the economy in 2020 and 2021.

But this stance has led to a feeling that Mr. Powell will lead the Fed to err on the side of monetary ease as the Fed works to “tighten” the monetary strings.

That is, for whatever reason, Mr. Powell wanted to make sure the economy didn’t accidentally “fall apart” because he didn’t pump enough liquidity into the banking system while trying to stave off a financial collapse and bring the economy back to recovery.

On this side of the curve, Mr. Powell is concerned that he could take too much liquidity from the banking system, making it subject to an accidental shock that would send the financial system and the economy on a downward spiral leading to financial collapse. .

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That is, Mr. Powell wants to avoid responsibility for a real economic disaster. He knows he’s treading that territory and doesn’t want to be the one to end up identifying with the bad news.

Ultimately, I think many analysts and investors sense that fear in Chairman Powell.

And so these analysts and investors, in the current situation, are looking for a time when Mr. Powell will “turn around”. They are looking for a time when he says, “enough.”

But any such “early” decision leaves it up to the Fed and the economy to stop the relatively rapid inflation that now exists in the United States.

And, if the inflationary bug widens, the US will face importing the double-digit inflation now present in England, Europe and many other areas of the world.

So what have we achieved this year.

The Standard & Poor’s 500 stock index is as good a proxy as any.

On January 3, 2022, the S&P 500 closed at an all-time high of 4,796.56.

S&P 500

Standard & Poor’s 500 Stock Index (Federal Reserve)

On October 12, the S&P 500 closed at an all-time low of 3,577.03.

This represented a drop of 25.4 percent, leaving the index in “bear land”.

Since then, the index has rallied slightly, rising since Oct. 12, reaching Friday’s high of 3,901.06 on Oct. 28, up 9.1 percent from the Oct. 12 low.

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S&P 500

Standard & Poor’s 500 Stock Index (Federal Reserve)

Note that the chart does not include the 94-point gain the index achieved on Friday, October 28.

So, the stock market provides a lot of volatility in the short term.

One can look at the performance of the index as of January 3, 2022 and see how volatile the market has been this year.

But the takeaway from all this volatility is that very little of that volatility can be attributed to “real” economic factors.

The volatility has come as the investment community ponders the actions of Mr. Powell and other Federal Reserve leaders and vacillates between feeling that Mr. Powell will “pivot” and loosen the monetary brakes, or not “pivot” and “hold his ground” and keep your foot on the brake.

It seems to me that this behavior is driving the stock market this year.

The Federal Reserve raised its interest rate on March 16 and simultaneously began reducing the size of its securities portfolio.

My reporting has shown that the Fed has continued since then, raising its interest rate and further reducing the size of its securities portfolio, and has provided no action to suggest that it is “backing off” on its monetary tightening.

However, the market was quite volatile. Analysts and investors continue to believe that the Fed will “turn around”.

That’s what drives the stock market these days. All other “stuff” is just white noise.

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