Shares send strained message to Fed
SIGNS OF CENTRAL BANK-FOMENTED WOES ARE EVERYWHERE
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Donald Trump loves to bash Jerome Powell, blaming him for the market meltdown. And while people can debate if the hectoring is a good idea and whether the Federal Reserve cares about stocks, it’s getting harder to argue the president is totally wrong.
Signs of Fed-fomented stress are everywhere, from slumping bank stocks to the 33 per cent plunge in home builders since January. They’re in the market’s willingness to differentiate between defensive and cyclical stocks, a bias absent from past meltdowns. They’re in the giant yawn greeting stellar earnings, evidence investors have something else on their mind.
The fundamentals are strong, goes the refrain, and the economy can absorb some tightening. But with eight rate hikes in the book already and more to come, it’s obvious many investors are feeling otherwise. “This sell-off shows that the markets are pricing in slower growth and more risk,” said Ilya Feygin, senior strategist at WallachBeth Capital LLC. “The Fed may not necessarily see that.”
Whether or not they see it, policymakers say they don’t mind it. Up and down volatility “is typical” of stocks, Fed Bank of Dallas President Robert Kaplan said on Friday. “I don’t think they’re nervous now,” said Roberto Perli, a former Fed economist. “Their view is that stocks went up a lot the past many years, and adjustment at some point is going to happen.”
None of that helps if you’ve watched $10 trillion lopped from US equity prices in a month, even as bonds and currency remained calm. And while stocks are clearly their own animal, all hair-trigger volatility and bloated valuations, the possibility they are acting as a warning signal for the rest of the economy shouldn’t be discounted.
A more abstract concern relates to the reception corporate earnings received this season. In short, there wasn’t one. Companies that beat estimates didn’t rise, and companies that didn’t fell only moderately. Correlations, which usually loosen as corporate results cause individual stocks to chart their own course, never unwound, and in fact got tighter as the month progressed.
It smacks to some of a market with more pressing concerns.