Intersection of Markets & Politics
Written by: Ryan Bouchey
Wednesday’s speech by Federal Reserve Chairman Jerome Powell was both interesting and impactful in that it set a much different tone & direction for what the Fed may do going forward as it relates to interest rates. Not only was Chairman Powell’s comments an indicator of what the Fed may do moving forward, but it gave us a look into investor sentiment and what may have been driving investor behaviors these past two months as we saw markets briefly dip into correction (10% drop) territory.
As far as the Fed is concerned, Chairman Powell’s tune has certainly taken a 180 degree turn from his comments in early October. Back then the Fed announced they were well short of neutral from an interest rate perspective, meaning they had a long way to go in raising interest rates. This coincided pretty closely with the markets peak at the end of September, and may have been a driver of market volatility we experienced throughout October & November.
Where do politics come into play? Well it’s been no secret that President Trump hasn’t been the biggest Jerome Powell fan of late. Trump has blamed the Fed for raising rates too quickly, thereby derailing the markets. While we do not think only the Fed is responsible for this current sell off, nor do we think it’s appropriate for President to meddle with Fed policy, Powell’s remarks yesterday about interest rates being “just below” neutral levels was a much different tune than what he said just last month without giving much explanation for why we went from well below neutral to just below neutral. As you can see from the S&P 500 chart from yesterday, the markets viewed this as a real positive sign:
What this tells me is that markets have been spooked lately by the threat of rising interest rates. While we continue to be of the opinion that at these historically low rates a rising interest rate environment won’t be the only reason to slow down markets or the economy, at some point too high of interest rates are detrimental – but we still have some room before we get there. The markets and economy will eventually slow down due to a combination of higher rates and other existing factors that may not have presented themselves yet. It’s hard to say if yesterday’s market rally will continue moving forward, but we are of the mindset that given current stock valuations and economic conditions there is room to run in this rally. And with yesterday’s reaction, we are led to believe that the fear of fast rate hikes was a major headwind for the markets. If the Fed changes its tune and decides to move forward at a slower pace, could be a big benefit for investors. Combine that with potential resolution with China, and we may be heading towards a Santa Rally after all!