The Stock Market: It’s Still About The Fed

Financial volatility

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Like it or not, when the talk of the stock market comes up these days, the point still comes down to what the Federal Reserve is going to do.

Read the writings about the action in the stock market this week, or, last week, and you get a suggestion that the performance of financial institutions was behind the increase in the stock market this week, or, that the better than expected third quarter GDP growth indicated that the economy was doing better than many expected.

But, right after these reasons are given, attention is then directed to the Federal Reserve Board.

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

Almost everyone expects the FOMC to raise its policy interest rate by 75 basis points, bringing the effective Federal Funds rate to 3.83 percent.

The big debate right now?

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

People were expecting another 75 basis point hike in the rate, but word came out this past week that the Fed might only raise its policy rate by just 50 basis points.

That would mean that after five consecutive hikes of 75 basis points each meeting, the Fed would back off such a strong move.

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

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A move like this, for many investors, is seen as a “big” adjustment like this.

There is no proof of this. There are no details about such a “pivot”.

As far as I can read the market, the investor judgment is a judgment on Fed Chairman Jerome Powell.

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

But, mr. Powell always led in a way where the Fed erred on the side of monetary ease.

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

But this attitude led to the 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 is making sure the economy doesn’t accidentally “fall apart” by not pumping enough liquidity into the banking system as he sought to prevent a financial collapse and steer the economy back into recovery.

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

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That is, Mr. Powell wants to avoid being responsible for a real economic disaster. He knows he’s stepping into that territory, and doesn’t want to be the one who ends up being identified with the bad news.

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

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

But any such “early” decision does not allow the Fed and the economy to stop the relatively rapid inflation that now exists in the United States.

And if the inflationary bug spreads, the US is faced with importing the double-digit inflation now being experienced 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 representative as any benchmark.

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 since peaking at 3,577.03.

This represents a 25.4 percent decline that keeps the index in “Bear land.”

Since then, the index has picked up a bit, rising since Oct. 12 to the Friday high it hit on Oct. 28 of 3,901.06, up 9.1 percent since 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 rise the index made on Friday, October 28.

The stock market therefore offers a lot of volatility in the short term.

And one can look at the performance of the index going back to January 3, 2022, and see just how volatile the market has been this year.

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

The volatility came as the investment community reflected on the actions of Mr. Powell and the other Federal Reserve leaders and swing between feelings that Mr. Powell will “pivot” and ease on the monetary brakes, or they won’t “pivot” and will “stick to their guns” and keep their foot on the brake.

This behavior seems to me to be driving the stock market this year.

The Federal Reserve raised its interest rate on March 16 and at the same time began reducing the size of its bond portfolio.

My reporting indicated that the Fed has continued since then, raising its interest rate and further shrinking the size of its securities portfolio, providing no actions to suggest that it is backing away from its monetary tightening.

Still, the market was quite volatile. Analysts and investors still believe that the Fed will “turn”.

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

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