Not buying. Stocks slipped yesterday in the wake of Wednesday’s Fed comments as investors searched for a reason to buy stocks. Weekly unemployment numbers improved but remain stubbornly high.
N O T E W O R T H Y
Talk is cheap. How many times have you heard that? “Actions speak louder than words” may be a call to action in many cases, but not necessarily when it comes to the stock markets. My regular readers are well aware of how I like to draw a clear and bold line between investors and traders. Investors are focused on achieving longer term goals. They set in motion strategies to either gain income or grow principal, making adjustments along the way to fit market conditions and keep their strategies on track. It is not a simple task and it takes patience and lots of focus. Traders, on the other hand, are less focused on long terms goals but rather, aim to achieve short-term gains by attempting to time the market, often reacting to some sort of news or event. That being said, the high volatility that has been with the markets since the onset of the pandemic has certainly provided the event-driven traders with lots of opportunity to make… and lose money. Now that we have that out of the way, let’s move on to my tagline about cheap talk. The Federal Reserve Bank is staffed by bankers and economists. You know, two groups of folks which are not necessarily known for their flamboyance but rather, their steadfast, buttoned-down, methodical demeanors. The Federal Reserve Bank building is rather small compared to the many others in DC that headquarter the various Federal agencies. The building exudes a sense of strength, humility, and simplicity. Its columns are straight with lots of right angles and the main facade is dotted by an unimposing, but bold, bald eagle. No hidden messages… it is the bank of banks… what you would expect, and what you would want from the most powerful bank in the world.
Banking has changed a lot in the past few decades. ATM machines and online banking have given way to cafe-like lobbies at some bank branches. Gone are the green banker’s lamps, which have been replaced by purple and blue pendent lights. Bankers no longer wear green visors or black sleeve protectors, but their conservative demeanors have endured. The Federal Reserve System was established in the early 1900’s but the Bank acquired its more well-known charter through the Banking Act of 1933, creating the Open Market Committee which was charged with open-market operations. Visors soon gave way to pocket protectors as the data driven bank became the custodians of the financial markets. As one might expect, the Bank’s great power made them a target of political rhetoric. The term “jawboning” was invented to describe the pressure put on the bank through the words of politicians. Politicians hoping for lower rates to spur economic growth on their watch would attempt to goad the bankers into action. The bank, which is supposed to be apolitical and data driven, largely remained silent and diligent. But by the 1970’s things began to change a bit. Inflation was running high, the post-war economic boom was ending, and there was social unrest which led to increased verbal pressure on the bank. By the 1980’s the bank recognized that it had power beyond its open-market operations as markets began to attempt to anticipate its moves. When Alan Greenspan took office in 1987, I am sure that he did not realize that he would be recognized for the creation of one of Wall Street’s famous catch phrases: irrational exuberance. By the time he first uttered those words, causing markets to fall some -3%, he had already witnessed his words’ impact on the markets many times over. Many years later, in the early 2000’s, Fed talk started to become strategic. The Fed recognized that it could achieve some of its policy goals by simply signaling them to the market, though the signals were always backed by market actions and policy changes. Pocket protectors have now given way to pocket squares, and once-stodgy bankers have now become celebrities with packed speaking engagements. Though the engagements cover all sorts of topics, the bankers are always quick to comment on policy, frequently causing market reactions. Speech has become a powerful tool. In recent months, the Fed has stepped up its support of the economy through broad and deep actions, utilizing monetary tools never seen before. Its initial salvo was critical in turning around the slipping economy and falling market. Federally controlled fiscal stimulus followed, which further fueled the turn-around. The Fed has since been searching for additional tools to carry the economy from turn-around to recovery, and it has settled on one of its historically most powerful ones: words. The Bank has decided to signal to the markets, through extended forward guidance, its policy plans for a long time to come. They have clearly stated that they will tolerate higher levels of inflation while maintaining low interest rates for a long period of time. The action seems somewhat brazen given the institution's humble, buttoned-up beginnings. But these are unprecedented times, which call for extreme measures. However, investors have become more savvy, as they too, have evolved over the years. Investors have learned that talk is cheap and that nothing is better than good old monetary and fiscal stimulus, as the economy runs on dollars and not hot air. Today, St. Louis Fed President James Bullard, Atlanta Fed President Raphael Bostic, and Minneapolis Fed President Neel Kashkari will all speak. We can count on them to toe the company line of lower rates for longer. On Capitol Hill, lawmakers continue to talk about the need to enact further stimulus, despite several failed attempts to agree on a package. At this stage however, it is still just talk… and traders know better.
THE MARKETS
Stocks sold off yesterday as traders parsed Fed policy statements, which offered them little comfort. The S&P500 slipped by -0.84%, the Dow Jones Industrial Average fell by -0.47%, the Russell 2000 Index traded off by -0.63%, and the Nasdaq Composite Index gave up -1.27%, as tech continued to lose ground. Bonds advanced and 10-year treasury yields slipped by -1 basis point.
NXT UP
- Leading Economic Index (Aug) is expected to have grown by +1.3% compared to last month’s +1.4% advance.
- University of Michigan (Aug) may come in at 75.0, up slightly from the prior reading of 74.1.
- Next week, we will get a number of additional housing numbers, more regional Fed reports, Markit Manufacturing/Services PMIs, and Durable Goods Orders.
Check back on Monday for calendars and details.