It’s been a rough week for traders. Real yields posted one of their biggest spikes in modern history and everyone’s favorite investment vehicle (ARKK) ARKK -1.1% entered a bear market. Momentum stocks are going belly-up and reopening trades are losing their mojo.
As far as Fed Chair Jay Powell’s concerned, it’s all a distraction.
It… “caught my attention,” Powell told the Wall Street Journal on Thursday. Like when you’re walking down 5th Ave and there’s a nice suit in a window display. No reason to stop — maybe you’ll come back one day. Let me phrase it another way: Jay Powell isn’t here to save your meme stocks. Here’s here to chew bubblegum and get back to full employment. And he’s all out of bubblegum.
Everyone knows by now that Powell is not going to let inflation get in the way of achieving his goals. What they apparently did not know was that Powell isn’t going to let market volatility get in his way either — at least not yet.
That is a big deal. For years, there’s been a prominent narrative that the Federal Reserve is the guardian angel of the U.S. stock market. It was never based on any real empirical data, just a mythos that fed on itself as stocks managed to always find a way higher, and interest rates… always managed… to find a way… lower. OK, so maybe it isn’t that absurd of a notion. Anyone who tells you interest rates and quantitative easing have not played an enormous role in keeping stocks rallying for a decade-plus is off their rocker. Yes earnings also mostly climbed, yes there’s been tons of tech innovation, this, that, sure. But bottom line: I’ve been asking investors for almost a decade why they’re buying stocks and bonds and the foremost, most frequent answer is: the Fed.
This logic was never more obvious than in the past year, as a huge dose of monetary and fiscal support kept the party going and made everyone feel invincible — from day-trading Redditors YOLOing Tesla TSLA -3.8% calls to serious, big-money institutional investors. And now, by no instruction from Chair Powell, they expect the Fed to ramp up the money-printer again. Example A: on Monday, Bloomberg cited strategists from Jefferies, Bank of America BAC +1.2%, and Credit Suisse CS +0.2% calling for the Fed to control the yield curve via a “Twist” program.
Ridiculous. Because 10-year yields achieved a whopping 1.5% and the most expensive stock market in history barely hit a correction? Powell is right to let the froth come off.
Frankly, he’s also partly at fault for the froth to begin with, after reversing rates at the first sign of volatility and amid pressure from President Trump at the end of 2018. Financial conditions were the loosest for a rate-cut in history and inflation rose, but yields went down. How could one not be forgiven for thinking the Fed was at the market’s back? Just look at the Google Trends chart for the term “stonks,” — it was birthed right at the start of the big reversal!
But I’m not here to judge. What’s done is done. What matters right now is that Powell has one goal: to get the economy back to where it was before the pandemic, and rising rates are not going to stop him. If you want to know when he’ll care about the stock market, then you’ve got to figure out how low the market needs to go before tightening the economy. I don’t know.
What I do believe is that the long-end of the bond market is going to run wild until some major economic downturn, a crash in the market, or yield-curve control. “J-Pow” is right to play it cool right now, with stocks grossly overvalued by every measure, but I suspect we may see a change of tone if bond yields go the way I think they will — up, persistently. If the trend in yields keeps going, then the downtrend in expensive stocks will too, unless Powell decides it’s derailing the economy. Next we hear from him will be March 17, so buckle up: this part gets bumpy.
I am the Lead Anchor at TD Ameritrade Network, and the host of Morning Trade Live and Market On Close. I co-anchored Bloomberg BusinessWeek on TV and contributed to