Like it or not, when the talk these days comes to the stock market, the bottom line always comes down to what the Federal Reserve is going to do.
He writes the ups on the action stock market this week, or, last week, and you get a hint that the performance of financial institutions was behind the increase in the stock market this week, or, that better than expected third quarter GDP growth indicates that the economy has done better than many expected.
But after giving these reasons, the attention is then directed to the Federal Reserve.
The Federal Reserve has a meeting of its Federal Open Market Committee, the policy-making group at the Fed, 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 up to 3.83 percent.
Big debate right now?
What will the Federal Reserve do at the December meeting of the FOMC.
People expected another 75 basis point increase in the rate, but the word came around last week that the Fed may only increase its policy rate by only 50 basis points.
This would mean that after five consecutive increases of 75 basis points, the Fed would be backing off from such a strong move every meeting.
As word spreads through the investment community, quite a few “investors” are talking about a “pivot” in the Federal Reserve’s monetary policy.
A move like this, in many investors, is to see an adjustment like this is “greater.”
There is no evidence of this. There are no specifics about such a “pivot.”
As far as I can read the market, the investor’s judgment is a judgment on Fed Chairman Jerome Powell.
Chairman Powell led the Federal Reserve through the spread of the Covid-19 pandemic, the subsequent economic recession, the supply chain problem, and other disrupted sectors or markets.
But Mr. Powell has always steered in a way where the Fed has erred on the side of monetary easing.
This is one of the reasons why many believe that the Fed’s plan to stop inflation does not remove nearly enough of the liquidity that Mr. Powell and the Fed pumped into the economy in 2020 and 2021.
But 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.
That is, for whatever reason, Mr. Powell wanted to make sure the economy didn’t accidentally “fall apart” because he wasn’t pumping enough liquidity into the banking system while trying to prevent a financial collapse and get the economy going back to recovery
On this side of the curve, Mr. Powell is concerned that it could take too much liquidity from the banking system, making it subject to a crash shock that would send the financial system and the economy on a downward path leading to a financial collapse. .
That is, Mr. Powell wants to avoid being responsible for a real economic disaster. He knows he’s treading on this territory, and he doesn’t want to be the one to ultimately identify with the bad news.
Bottom line, I think many analysts and investors feel this fear in President Powell.
And so these analysts and investors, 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” decisions leave the Fed and the economy short of stopping the relatively rapid inflation that currently exists in the United States.
And, if the inflation bug spreads, the US will face double-digit import 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 measure.
On January 3, 2022, the S&P 500 closed at an all-time high of 4,796.56.
On October 12, the S & P 500 closed at a low for the time since the high of 3,577.03.
This represented a decline of 25.4 percent holding the index of “Bear country.”
Since then the index has picked up a bit and has risen since October 12, on the high Friday it reached on October 28, at 3,901.06, an increase of 9.1 percent from the lowest on October 12.
Note that the chart does not include the index’s 94-point increase on Friday, October 28.
So the stock market gives quite a bit of volatility in the short run.
And, one can look at the performance of the index back to January 3, 2022, and see just how volatile the market was 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 mulled over the actions of Mr. Powell and other Federal Reserve leaders and wavered between sentiments that Mr. Powell would “pivot” and ease monetary tightening, or not “pivot” and “drink the guns.” and keep the foot on the brake.
This behavior seems to me to drive 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 report indicated that the Fed has continued on since then, raising its policy interest rates and further reducing the size of its securities portfolio, and has not given any action suggesting that it has “backed off” at most its monetary savings.
But the market was quite volatile. 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.