The Fed isn’t here to fuel animal spirits—Powell may remind investors of that at Jackson Hole.
KEY TAKEAWAYS
MY HOT TAKES
Stocks in the… purple. I’m sorry Millennials and Gen-Zs, the 1970s were magical–those of us who were around in those days are lucky to have memories of a very different time. One of my great memories from the 1970s was the Mood Ring craze. There were a few kids in my elementary school class who were on the bleeding edge of pop culture. Everything from fashion to shiny gadgetry, these kids had it, and they would stir up large circles of the curious on the playground when the latest and greatest hit the scene. I remember when the first Mood Rings showed up. They would change color to reflect the wearer’s mood! 😮 I can see your face right now, as you are thinking “so what’s such a big deal about that?” If that is you, you just gave away your age and the fact that you are probably wearing an Oura ring. 😉 Those of you who were actually around during those days know that, back then, high tech was color TV and FM radio.
I had the privilege of starting my week off at Bloomberg’s supercool HQ for a TV interview. I love the early shift because it fits perfectly into my workflow, and it gets me to my desk before most of you even hit snooze for the first time. This Monday morning, the TV host–one of my favorites–and I chatted before we were cued in. We both commented on how quiet things were to start off the week. To be clear, we had lots of very current and hot topics to discuss, but absent were the typical pillars of smoke off in the distance resulting from a firestorm of Sunday morning talkshow rounds by Washington insiders.
Of course we covered the Fed, inflation, tariffs, crude oil supply, AI stocks, earnings, market seasonality–all drivers of the markets these days. And then it came up. Jackson Hole. As in the Jackson Hole Economic Policy Symposium, hosted by the Federal Reserve Bank of Kansas City. Sounds exciting, doesn’t it? What, it's not on the top of your list for late-summer getaways? Folks, Jackson Hole is the Superbowl for economic nerds! The Comic Con for Fed policy fanboys. It started out in the late 1970s as a farming-focused policy confab, but famous Fed Head and Inflation-fighter Alan Greenspan would change all that in the 1980s.
The event was first hosted at Jackson Hole, Wyoming in 1982 and selected specifically to entice then Fed Chair Paul Volcker to attend. He was an avid fly fisherman, and the lure (🤣) of a serene fishing haven was just what it took to pull Volcker away from his interest-rate-hiking frenzy. After Greenspan’s free-market speech in ‘89, the world was treated to a steady stream of major policy pronouncements by global central bankers. From Bernanke (2010 QE2) to Mario Draghi (2012 - “whatever it takes”) to Powell (2020 - average inflation targeting).
Speaking of Powell, here are the highlights of his appearance at Jackson Hole during his tenure as Chairman. In 2018, as a neophyte Chairman, he defended gradual rate hikes and Fed independence despite Trump’s attacks; in 2019 he flagged global risks, headwinds from the U.S.-China trade war and hinted at rate cuts; in 2020, during the pandemic, he unveiled the Fed’s historic shift to average inflation targeting, allowing inflation to run above 2%; in 2021 he reassured investors that tapering bond purchases would not mean imminent rate hikes; in 2022 he delivered his stark “pain” speech, warning of hardship as the Fed tightened to fight inflation, which rattled markets; and in 2023 he doubled down, signaling that rates would stay restrictive until inflation was back under control; and in 2024 he struck a more cautious tone, acknowledging cooling inflation but stressing that the Fed would not rush into cuts, underscoring a commitment to balance progress on prices with stability in growth and employment.
Now, if you read that all carefully, you would probably conclude that it is a whole bunch of nothing. You see, the Chair is expert at revealing… well nothing, while appearing to be completely transparent. He is quite possibly one of the best bureaucratic wordsmiths to take the podium in history. No policy, no words, no hints before their time.
I would like to say that this year it’s different, but it really isn’t. Fed policy is always important, and the markets are very much tapped into it, for both right and wrong reasons. The right reasons are simple. Interest rates are important for companies who borrow capital for investment and consumers who borrow to… well, spend more than they have. Both are big drivers of economic growth and together pretty much make up the entire economy. So, yeah, markets should focus on interest rates–where they are and where they are headed.
But there are also some wrong reasons. I am switching stories for a moment–bear with me. I love my dog Eloise. 🐶 Every night as my wife and I are getting ready sit down for dinner, Eloise runs to the couch and starts to bark on the top of her lungs. She will continue the annoying display until one of us gives her one of her favorite treats. Now, calm down dog people–I know that this is bad dog owner behavior, but hear me out. My wife and I always give in and Eloise’s bad behavior is rewarded. Actually, it is not her bad behavior, but really mine and my wife’s. We have, in a way, trained her to expect the treat, and her way of getting it is by barking.
Markets lately have unfortunately become dependent on treats from the Fed to fuel sentiment. What would a 25 basis-point Fed Funds rate cut do for Palantir or NVIDIA? Keep thinking. Nothing! Now, I know that the clever amongst you–my dear followers–might correctly assert that building data centers is capital intensive and lower costs of capital make data center development cheaper and would therefore increase orders for NVIDIA’s Blackwell chipsets. Ok, but really? Of course, not.
Look, the broader market is just below all-time highs despite massive macro headwinds. There are lots of good things happening as well, but still many of these macro headwinds have been overtaken in recent weeks with indexes hitting high after high. That takes a lot of energy and, of course, animal spirits.
As I recall, the Mood Ring came with instructions that would help you interpret its colors. Blue meant happy, relaxed, and comfortable. Purple meant passionate, excited, even amorous. If markets were wearing a Mood Ring, it would have most certainly been in the blue to purple range recently. Animal spirits–as mentioned before–take energy, and in order to maintain that purple hue, they need fuel. A very solid earnings season helped. Two dissenting FOMC members also helped. Adding to that, a really weak employment number caused bets for a September rate cut to go from a low chance of 40% to a sure bet in just over a week. It has since cooled to a 79% chance in recent days–still a high probability. I would say that the market, at this point, is counting on a Fed rate cut next month.
It did not take too long for investors to wake up on Monday to come to the reality that Powell’s Friday speech may not come with the dog treat they were hoping for. In fact, when they thought better of it, chances of Powell’s doing the opposite–striking a hawkish tone, began to grow. By midday, yesterday, the market mood ring was amber-hued, representing nervous, uneasy, and unsettled.
Are you wondering exactly what that market Mood Ring looks like? Just picture a portfolio of those megacap tech stocks that catalyzed the indexes’ rush to all-time highs. I read the MIT report about AI’s return on investment–sorry, the thesis for earnings has not changed. What changed was the color of the market’s mood ring as it eyes Powell’s upcoming comments on Friday, and for good reason. The Chair is unlikely to give in to the incessant barking by Washington and Wall Street. Sorry Eloise, not this time.
YESTERDAY’S MARKETS
Stocks closed mixed but lower as tech selling continued to drag indexes down. Jitters over the Fed and overbought AI kept market leaders on the sidelines. J-Pow at J-Hole continues to drive emotions, especially in high-beta, high-momentum stocks–a reminder that volatility works in both directions.
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