Like it or not, when talking about the stock market these days, the bottom line still comes down to what the Fed is going to do.
Read written records of actions The stock market this week or last week, you get a hint that the performance of financial institutions is behind the stock market rally this week, or, Better-than-expected GDP growth in the third quarter Indicates that the economy is doing better than many expected.
But after these reasons are given, attention turns to the Fed.
The Fed will hold a meeting of the Federal Open Market Committee, the Fed’s policy-making group, on Nov. 1-2.
Almost everyone expects the FOMC to raise the policy rate by 75 basis points, bringing the effective federal funds rate to 3.83%.
The big debate now?
What the Fed will do at the December FOMC meeting.
Rates had been expected to rise by another 75 basis points, but news broke last week that the Fed may only raise policy rates by 50 basis points.
This means that after five consecutive rate hikes of 75 basis points, the Fed will abandon such a strong move at each meeting.
As the word spread in the investment world, many “investors” were talking about the “pivot” of the Fed’s monetary policy.
For many investors, such a move is seen as a “major” adjustment.
There is no evidence for this. There are no details about this “pivot”.
As far as I know, the investor’s judgment is that of Fed Chairman Jerome Powell.
Chairman Powell has guided the Fed through the spread of the Covid-19 pandemic, the ensuing recession, supply chain issues and other disrupted industries or markets.
But Mr. Powell’s leadership has always allowed the Fed to err on the side of monetary easing.
That’s one reason so many people think the Fed’s plan to stop inflation isn’t removing enough of the liquidity that Mr. Powell and the Fed have pumped into the economy in 2020 and 2021.
However, this attitude has led to a feeling that Mr. Powell will cause the Fed to err in monetary easing, as the central bank struggles to “tighten” monetary policy.
That said, for whatever reason, Mr. Powell wants to make sure the economy doesn’t accidentally “collapse” by not injecting enough liquidity into the banking system as he tries to prevent a financial collapse and bring the economy back to recovery.
On this side of the curve, Mr. Powell worries that he could draw too much liquidity from the banking system, subjecting it to an unexpected shock that could bring the financial system and economy downhill, leading to a financial collapse.
That said, Mr Powell wants to avoid being responsible for a real economic disaster. He knew he was dabbling in that field and didn’t want to be the one who ended up being identified as bad news.
At the end of the day, I think many analysts and investors feel that fear in Chairman Powell.
So under the current circumstances, these analysts and investors are looking for Mr. Powell’s “turn”. They were looking for the time when he said “enough”.
But any such “early” decision would leave the Fed and the economy unable to stem the relatively rapid inflation that currently exists in the United States.
And, if the inflation problem spreads, the U.S. will face importing double-digit inflation that the U.K., Europe and much of the rest of the world is currently experiencing.
So, what have we achieved this year.
The S&P 500 stock index is as representative as any measure.
On January 3, 2022, the S&P 500 closed at an all-time high of 4,796.56.
On Oct. 12, the S&P 500 closed at its lowest point since a high of 3,577.03.
That represented a 25.4% drop, keeping the index in “bear country”.
The index has since recovered slightly, rising since Oct. 12 to a Friday high of 3,901.06 on Oct. 28, up 9.1% since its Oct. 12 low.
Note that the chart does not include the index’s 94-point rise on Friday, October 28.
Therefore, the stock market offers considerable volatility in the short term.
And, one can view the index’s performance since January 3, 2022, and see how volatile the market has been this year.
But the takeaway from all these fluctuations is that very little of it can be attributed to “real” economic factors.
As the investment community reflects on the actions of Mr. Powell and other Fed leaders, and whether Mr. Powell will “turn” and ease the monetary brakes, or they won’t “turn” and will “stick their guns” and hit the brakes.
It seems to me that this behavior has driven the stock market this year.
The Federal Reserve raised its policy rate on March 16 and also began reducing the size of its portfolio of securities.
My report suggests that the Fed has since continued to raise its policy rate and further reduce the size of its portfolio of securities, and has provided no action to suggest that it is “unwinding” its monetary tightening policy.
However, the market has been volatile. Analysts and investors continue to believe the Fed will “turn.”
That’s what drives the stock market today. All other “stuff” is just white noise.