The Stock Market: It’s Still About The Fed

Financial instability

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Like it or not, when the buzz is around the stock market these days, the bottom line still comes down to what the Federal Reserve is going to do.

Read up on the article on Action In the stock market this week, or, last week, and you get a suggestion that the performance of financial institutions is behind the stock market rally this week, or, Better than expected third quarter GDP growth He indicated that the economy is doing better than many expected.

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

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

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 now?

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

People were expecting another 75-basis point hike in rates, but word got around this past week that the Fed would only raise its policy rate by 50 basis points.

This would mean that after five consecutive 75-basis point hikes, the Fed would be supporting such a strong move at each meeting.

As word spreads through the investment community, many groups of “investors” are talking about a “pivot” in Federal Reserve monetary policy.

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Such a move, for many investors, seems like a “major” adjustment.

There is no proof of this. There is nothing special about such a “pivot”.

As far as I can read the market, the investor’s decision is Fed Chairman Jerome Powell’s decision.

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

But Mr. Powell always led in a way where the Fed erred on the side of monetary easing.

That’s one reason many people believe the Fed’s plan won’t remove enough liquidity to stop the inflation that Mr. Powell and the Fed pumped into the economy in 2020 and 2021.

However, this attitude has led Mr. Powell to feel that he will lead the Fed to err on the side of monetary easing as the Fed works to “tighten” the monetary strings.

That is, for whatever reason, Mr. Powell wanted to make sure that the economy didn’t accidentally “collapse” because he didn’t pump enough liquidity into the banking system as he tried to prevent a financial collapse and get the economy back on track. recovery.

On this side of the curve, Mr. Powell worries that he could squeeze too much liquidity out of the banking system, leading the financial system and the economy toward financial collapse. .

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

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Bottom line, I think many analysts and investors feel this fear in President Powell.

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

However, any such “early” decision leaves the Fed and the economy to prevent the relatively rapid inflation that currently exists in the United States.

And, if the inflation bug catches on, the U.S. faces double-digit inflation imports that are now being experienced in England, Europe, and many other regions of the world.

So, what have we achieved this year?

Standard & Poor’s 500 stock index is as good a representative as any measure.

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 3,577.03 from a high to an all-time low.

This represents a decline of 25.4 percent, putting the index in “bear country”.

The index has risen slightly since then and has risen since Oct. 12 to hit Friday’s high of 3,901.06 on Oct. 28, up 9.1 percent from the Oct. 12 low.

S&P 500

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

Note that the chart does not include the index’s 94-point increase on Friday, October 28.

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Therefore, the stock market is offering a lot of volatility in the short term.

And, one can look at the index’s performance going back to 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 this volatility can be attributed to “real” economic factors.

The volatility comes as the investment community reflects on the actions of Mr. Powell and other Federal Reserve leaders and alternates between sentiments that Mr. Powell will “pivot” and ease into monetary breaks, or that they will not “pivot.” Will ‘stick to their guns’ and put their foot on the brake.

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

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

My reporting has indicated that the Fed has continued since then, raising the policy rate of interest and reducing the size of its securities portfolio, and has not provided any actions to suggest that it has “backed off” from monetary tightening.

However, the market is very volatile. Analysts and investors continue to believe that the Fed is going to “pivot.”

This is what drives today’s stock market. All other “stuff” is just white noise.

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