The Stock Market: It’s Still About The Fed

Financial volatility

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

Read the descriptions of the action in the stock market this week, or, last week, and you get a suggestion that the performance of financial institutions was behind the increase in the stock market this week, or, that the third quarter GDP growth was better than expected indicated that the economy was doing better than expected.

But, immediately after giving these reasons, attention is then directed 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 expects the FOMC to raise its policy interest rate by 75 basis points, bringing the effective Federal Funds rate up to 3.83 percent.

The big debate right now?

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

People were expecting another 75-basis-point increase in the rate, but, word got around last week that the Fed might only be going to 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 every meeting.

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

A move like this, for many investors, is seen as an adjustment like this “big.”

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

As far as I can read the market, it is the investor’s 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 problems, and other sectors or markets that were disrupted.

But Mr. Powell has always presided over a way in which the Fed has erred on the side of monetary easing.

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

But, this view is the result of 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 ensure that the economy did not accidentally “collapse” because he was not pumping enough liquidity into the banking system while trying to prevent caused financial collapse and brought the economy back to. recovery

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

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

Bottom line, I think many analysts and investors share this fear with 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 says, “enough is enough.”

But, any such “early” decision leaves the Fed and the economy short of halting the relatively rapid inflation in the United States.

And, if the inflation bug spreads, the United States is faced with importing the double-digit inflation that is now 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 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 an all-time low from a high of 3,577.03.

This represents a decrease of 25.4 percent to keep the index in “Bear country.”

Since then the index has picked up a bit and has risen since October 12, to the Friday high it reached on October 28, of 3,901.06, a rise of 9.1 percent from the low on October 12.

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S&P 500

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

Note that the 94-point increase is not included in the chart made on Friday, October 28.

Therefore, the stock market is providing a bit of volatility in the short term.

And, you can look at the performance of the index 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 came as the investment community ponders the actions of Mr. Powell and other Federal Reserve chiefs and sways between sentiments that Mr. Powell will “pivot” and ease the monetary brakes, or that they will not “pivot” and They will ‘stick to their guns’ and keep their feet on the pavement.

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

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

My reporting indicated that the Fed has continued since then, raising its policy interest rate and further reducing the size of its securities portfolio, and provided no actions to suggest that it was “at support” from its monetary tightening.

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

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

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