The Stock Market: It’s Still About The Fed

Financial instability

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Like it or not, when it comes to the stock market these days, it still boils down to what the Federal Reserve will do.

Read the article ups about the action the stock market this week or last week, and you receive a suggestion that financial institutions have been behind the stock market’s rise this week, or GDP growth in the third quarter was better than expected indicated that the economy is doing better than many expected.

But immediately after stating these reasons, attention turns to the Federal Reserve.

The Federal Reserve is holding a meeting of the Federal Open Market Committee, the Fed’s policymaking arm, 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 the Federal Reserve will do at the December FOMC meeting.

People had been expecting another rate hike of 75 basis points, but last week there were reports that the Fed might only raise its policy rate by 50 basis points.

That would mean that after five consecutive 75-basis-point hikes at each meeting, the Fed would back away from such a strong move.

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

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Many investors consider such a move “significant”.

There is no evidence for this. There is no concrete information about such an “angle”.

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

Chairman Powell led the Federal Reserve through the spread of the Covid-19 pandemic, the ensuing economic downturn, supply chain issues and disruptions to other industries or markets.

But Mr. Powell always guided that the Fed erred on the side of monetary easing.

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

But that attitude has created a sense that Mr. Powell will push the Fed to err on the side of monetary easing as the Fed works to “tighten” the monetary strings.

This means that for some reason Powell wanted to make sure the economy didn’t accidentally “fall apart” because he didn’t inject enough liquidity into the banking system in an attempt to prevent a financial meltdown and get the economy back on track. recovery.

On this side of the curve, Powell worries that he could remove too much liquidity from the banking system, leaving it vulnerable to a random shock that would send the financial system and economy into recession, leading to a financial meltdown. .

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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 who ends up being identified with the bad news.

Finally, I think many analysts and investors feel this fear of Chairman Powell.

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

But any such “early” decision prevents the Fed and the economy from stopping the relatively high inflation that currently exists in the United States.

And if the inflation bug spreads, the U.S. faces double-digit inflation imports that are now in England, Europe, and many other parts of the world.

So what have we achieved this year.

The Standard & Poor’s 500 stock index is as good 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 Oct. 12, the S&P 500 closed at an all-time low since a high of 3,577.03.

That meant a drop of 25.4 percent, keeping the index in “Bear country.”

Since then, the index has rallied slightly, rising since Oct. 12 to Friday’s high of 3,901.06 on Oct. 28, a 9.1% gain 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 index’s 94-point gain on Friday, October 28.

So the stock market provides quite a bit of volatility in the short term.

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

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

Volatility has emerged as the investment community ponders the actions of Mr. Powell and other Federal Reserve chiefs and alternates between feeling that Mr. Powell will “turn around” and ease the monetary brakes, or whether they will “not turn around” and “stick to their guns” and keep their foot on the brake.

I think this behavior is driving the stock market this year.

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

My reports show that the Fed has since continued to raise its policy rate and further reduce the size of its securities portfolio, and has taken no action to indicate that it is “backtracking” on monetary tightening.

However, the market has been quite volatile. Analysts and investors continue to believe that the Fed is about to “turn”.

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

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