(Bloomberg) – Reduce the stimulus and say goodbye to stock market armor. It’s been a bet for a decade. Now the moment has come. But there were no signs of disaster.
The Bulls can thank the set designer Jerome Powell, president of the Federal Reserve, who gave the award on Friday the strongest signal however, the central bank will start cutting monthly bond purchases this year. Not only did the terrifying T-word fail to halt the steady rise of stocks, the S&P 500 index recorded its biggest gain in a month and put its second best week of Jackson Hole since 2014.
Powell has done just enough to maintain the view that his goals are aligned with investment: growth fast enough to increase employment and earnings but not inflation, and a stimulus approach that avoids shocks and leaves real interest rates alone. While other Fed speakers sown anxiety with hawk statements in recent days, Powell’s messaging has eased tensions.
“Powell and the Federal Reserve should get a lot of credit for telegraphing the narrowing conversation and avoiding anger,” said Michael Arone, chief investment strategist at U.S. SPDR’s State Street Global Advisors. “I think I can take a small round of victory.”
Back in 2013, news that the Fed would slow down the purchase of treasury bills and mortgage-backed securities after the global financial crisis caused market spasms. Investors rushed to sell riskier assets for bond security in an episode nicknamed “taper tantrum. ”
But a bad memory of it shouldn’t spur conceptions that the upcoming breakdown of asset purchases will do the same, said Art Hogan, chief strategist at National Securities.
“What happened in 2013, unlike what is happening today, was the announcement of a decline,” he said in a telephone interview. “Today we have the opposite of the announcement of the downsizing – we have a well-choreographed, well-telegraphed plan, and transparency has mitigated any negative market reaction because it is so well known.”
Fed Bank of Dallas President Robert Kaplan he told Bloomberg in June, policymakers learned the lessons of 2013 and hoped to avoid a repeat. And hints that the reduction would begin by the end of the year have been in the public record at least since the Federal Open Market Committee meeting in July, according to minutes from that gathering.
The central bank has been buying $ 80 billion in treasuries and $ 40 billion in mortgage-backed securities a month since last year to support the U.S. economy during a pandemic, often cited as the reason for historic stock growth in the midst of a pandemic. There are many questions about how the narrowing will be measured. But Hogan of National Securities notes that even in reducing total purchases, the central bank is still far from stopping them. The Fed’s balance sheet could increase by another $ 700 million, he estimates.
Certainly, stocks need a lot of time before they react to policy changes – one week of uninterrupted navigation does not mean that storms are coming. Yet for all those concerned that the first tangible signs of a withdrawn stimulus represent a disaster for investors, the latest move is cause for encouragement.
The S&P 500 ended its fourth week out of six, as did the technologically heavy Nasdaq 100. Wider benchmarks are keeping pace with the addition of more than 2% in August, marking its third consecutive month of progress above that amount. S&P has recorded such consecutive gains only 13 times in the last three decades, according to Frank Cappelleri of Instinet LLC.
Speaking at a Jackson Hole policy forum, Powell said the U.S. economy had met a central bank test of “significant further progress” toward its inflation target and had made “clear progress” in the labor market. At the same time, he warned that the move to start shutting down the bond purchase program should not be interpreted as a sign that rate increases will soon follow.
“It was a kind of pigeon-conveying narrowing message, and it made the markets quite happy,” said Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research. “Powell has managed to send a message that the Fed will soon start to shrink, perhaps after the September FOMC meeting, but that it is still a pigeon message that it will take time, that policy will remain adaptable until more progress is made, especially on employment . ”
Investors, meanwhile, are following other developments, including congressional progress on the infrastructure deal, as well as $ 3.5 trillion budget resolution. Corporate America is also ending a historic earnings season, and vaccination rates against Covid-19 are typing more and more.
“We have great employment, we have big earnings, we have well-capitalized banks, we have economic data that looks pretty good,” Randy Frederick, general manager of trading and derivatives, told Charles Schwab Corp. I think it is in a really good position to narrow down, ”he said. If nothing else, he added, the market is worried about inflation, which means investors could “welcome the reduction when that happens”.