A small shift in language of Jerome Powell had major consequences for markets last week and has left investors wondering how concerned they should be about the future.
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After the Federal Reserve chairman said officials should weigh removing pandemic support faster and inflation was no longer transitory, the indexes bounced around like popcorn, meme stocks fell lower and volatility gauges surged in an anxious week for stocks. It was one of the toughest stretches since the outbreak of the coronaviruses when you add in rising angst about it.
At the same time, panic over the thought of an unsympathetic Fed was tempered by the fact that its bond purchases would continue into next year and the overall sturdiness of the U.S. economy. In the last three years, investors haven't had to deal with a more hawkish Powell.
The S&P 500 swung wildly throughout the week, at one point notching five straight closes of at least 1%, a bout of turbulence not seen in over a year. The VIX volatility gauge averaged its highest since January, and Treasuries rallied. The flight from risk assets continued into Saturday, as the price of Bitcoins plunged as much as 20%.
Here are five views on how dangerous the landscape is - or isn't.
After Powell told the Senate that the central bank will discuss a faster schedule for withdrawing stimulus, stocks sold off on Tuesday. After seeing the reaction in markets, he had a chance to walk it all back in a speech to the House on Wednesday, but people talk about the change in tone from the Fed but it is much more than that, said Matt Maley, chief market strategist for Miller Tabak Co. When Powell's comments ruffled the market, Powell softened his approach, but this time he doubled down. Maley said that a less-accommodative Fed creates headwinds for a stock market that is richly priced. Stocks are more expensive than the last time the central bank tapered. He said that they went out of their way for 10 months to make sure people knew they would be very gradual with their tightening - that has changed, and that has changed. They are hitting the brakes much harder. Bank of America spokesman Savita Subramanian is keeping her wary outlook for the rest of 2021. Powell said that the Fed is focused on inflation rather than employment.
In a note from the head of U.S. equity and quantitative strategy, we remain cautious on the S&P 500 amid a hawkish Fed tightening into an overvalued market.
She saw a reason for hope: seasonality. December has been the strongest month for the S&P 500.
Peter Mallouk, President of Creative Planning, said that the market had recently touched record highs, and many investors are looking for signs that its run might be over. When you get near a top where things are just moving along, you're looking for something that will change the narrative, he said in an interview.
Powell's inflation acknowledgment could be a good thing. There had been some serious denial there and people were starting to wonder, frankly, his view of the world, Mallouk said. Now that at least he is aware that there is inflation, I think people like that -- and I think people are worried about the party ending with the tapering, but also that people are more concerned about runaway inflation, so I think there is an offset there. He said that most investors view the response as positive and will have to take a breather once the Fed starts to move.
According to Chris Gaffney, president of world markets at TIAA Bank, Powell said that the central bank will be more aggressive, which could mean interest-rate hikes happen sooner than expected. But there is a silver lining: This will give investors confidence that the Fed won't get behind the eight ball on inflation -- that they are watching it, that they will be able to come in, he said.
While Fed officials could make a mistake, the thought of investors was shifted this week after people were worried that we would see an inflation spike, and that's going to continue, said Gaffney, who said that we're already seeing an inflation spike and that's going to continue. I think that investors are more confident after hearing the Fed chairman turn a little more hawkish or start to say, Yeah, we are watching inflation. Friday s jobs data reinforced to Liz Young, head of investment strategy at SoFi, that the labor market is healthy and the central bank has met its goal of full employment. She said that the Fed should increase its tapering to clamp down on rising prices as inflation runs hot. The economic backdrop is a factor in whether or not a tapering acceleration will be dangerous for markets.
If the market is strong and the economy strong, and we need to contain inflation in order to keep expanding, that is a good reason to do both of those things, she said.
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