The Stock Market: It’s Still About The Fed

Financial Stability

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

Read action essays on 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 the better-than-expected third-quarter GDP growth shows that the economy is better than many expected.

But, after these reasons were given, attention turned to the Federal Reserve.

The Federal Reserve has a meeting of its Federal Open Market Committee, the Fed’s policy making group, on November 1 and 2.

Almost everyone expected the FOMC to raise its policy interest rate by 75 basis points, which would bring the effective Federal Funds rate to 3.83 percent.

The big debate today?

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

People were expecting another 75-basis rate hike, but word came last week that the Fed could only raise its policy rate by 50 basis points.

This means that after five consecutive 75-basis point hikes, the Fed will pull back on such a strong move each meeting.

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

A move like this, to many investors, is seen as a change like this “major.”

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

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

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

However, Mr. Powell has always led in a way where the Fed has erred on the side of monetary ease.

This is one reason why many people believe that the Fed’s plans for stopping inflation do not capture the sufficient amount of liquidity that Mr. Powell and the Fed pumped into the economy in 2020 and 2021.

However, this attitude has 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.

In other words, for whatever reason, Mr. Powell wants to make sure the economy doesn’t accidentally “crash” because he didn’t pump enough liquidity into the banking system as he tried to prevent a financial collapse and restore the economy. recovery.

On this side of the curve, Mr. Powell worries that he could take too much liquidity out of the banking system, which could be subject to an accidental shock that would send the financial system and economy down a downward path. lead to financial collapse. .

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In other words, Mr. Powell wants to avoid being responsible for a real economic disaster. He knew he was walking into that territory, and didn’t want to be the one to end up being identified with bad news.

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

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

However, any such “early” decision leaves the Fed and the economy short of stopping the relatively rapid inflation that the United States currently has.

And, if the inflationary bug spreads, the US faces the importation of double-digit inflation currently 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 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 a low for the period since the high of 3,577.03.

This represents a decrease of 25.4 percent that keeps the index in “Bear country.”

Since then the index has risen slightly and has risen since October 12, to Friday’s high reached on October 28, at 3,901.06, a 9.1 percent increase since the October 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 increase in the index made on Friday, October 28.

Therefore, the stock market provides less volatility in the short term.

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

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

The volatility came as the investment community pondered the actions of Mr. Powell and other leaders of the Federal Reserve and moving between feelings that Mr. ‘stick to their guns’ and keep the foot on the brake.

This attitude to me is driving the stock market this year.

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

My reporting shows that the Fed has continued since then, raising the policy interest rate and further reducing the size of its securities portfolio, and has not taken any actions to suggest it is “backing off” from to tighten the money.

However, the market is changing quite a bit. Analysts and investors continue to believe that the Fed will “pivot.”

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

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