As The World Turns, Sometimes Quickly

Last week, I said that the stock market had three big questions for the Federal Reserve and its chair Jay Powell.  You can read the full article here, but the questions were as follows:

  1. What is the course of interest rates?
  2. What will happen with the Fed’s balance sheet?
  3. Will the Fed support the stock market, as it has in the recent past?

This past week saw a major market rally when Powell provided insight to two out of the three questions.

In a speech to the New York Economic Club on Wednesday, Powell sent a major signal to markets when he said that rates were currently ‘just below’ with the natural, neutral level of rates.

Of course, no one knows what the natural, neutral rate is and there is constant disagreement about what it should be.  But last month, Powell gave a speech saying that rates were ‘far from neutral,’ that scared investors and sent markets sharply lower.

The change in language seemed to answer question one, but perhaps more importantly, it may have provided some insight into question three.

Our own Ryan Craft takes the view that the shift in language seems more like Powell trying to walk back the market’s misinterpretation of his previous statements rather than a change in policy.

I agree with Ryan, but my takeaway is that markets can turn very quickly, sometimes unexpectedly.  The conclusion to my article last week was that we probably wouldn’t learn anything from his speech, but I was wrong, and markets shot higher on Wednesday.

Although it may be too early to count my chickens, it looks like we may have another one of those days today, after President Trump and China’s President Xi announced a truce in the trade conflict.

As of this morning, stock futures are 1.5 percent higher.  That’s not quite as high as what we enjoyed last week, but the day hasn’t even started yet, they may go higher.

Like with Powell’s speech, I didn’t think that the G-20 meeting in Buenos Aires would lead to anything meaningful.  I assumed that they’d conclude with a bland joint statement that didn’t say anything, but it looks like something was accomplished yesterday.

I don’t want to give the impression that the ‘all clear’ horn has sounded, we still face plenty of risk from here.  But, some clarity from the Fed and the truce on the trade conflict are both welcome and unexpected news.

We all know that things can happen quickly, and usually for the worse, so it’s nice to see when it happens the other way.