Over the past 30 years, I have been fascinated by watching the many actors in our financial markets. I say actors because it all seems like one big national play complete with all the theatrical variety of comedy, thriller, suspense, death, heartbreak, and even romance.
The curtain opens with the first act each early morning on the financial market stage with media pundits and “experts” predicting what we, the audience, can expect for the day. Now many times, these announcements in this first act are simply stating what we already know. But we, the audience, love it and wake up early every day to watch, listen or read the script of this opening act. The main stage is in New York, of course, because that is where true intellectuals live. They can stroll onto their stages early while the lazy Pacific coasters are still sleeping from, no doubt, previous late-night shenanigans.
These actors have been inspired and even compelled, due to their great wisdom and academic knowledge of the financial markets, to lecture us less woefully uninformed and inexperienced audience members on what to expect. To their credit, they care about us and don't want any harm to come to us. That is why each morning, the opening act is a bit long, sometimes extending to late in the day, but the script is very short and repeated over and over at nausea. This is done so our fragile minds can comprehend possibly a small portion of their great wisdom. The closing act of the day is similar.
The curtain opens, and these highly intelligent and insightful actors stroll with the ease of great confidence to front and center stage to pronounce wisdom such as, “Stock market will open lower today due to concerns over supply chain issues” or “Wall Street encouraged by rising corporate earnings.”
Boom! The great oracles have spoken, and immediately this profound message is broadcast across the land on television, news outlets, and newspapers (for those under 30, this is a stack of large sheets of paper with printed articles and pictures folded together typically found in the bushes each morning) and the internet.
The real players are the ones the actors are talking about, most notably politicians, Federal Reserve committee members, and corporate CEOs.
This year the talk is all about the Federal Reserve and the Federal Open Market Committee (the “Feds”). The funny aspect of this group is they are not very funny. Never a joke because they know every word, and even how they say a word is watched by the actors so closely that a slight misstep or grimace could cause unintended consequences. They are very serious about their role, and the leader of this influential group is the Chairman, currently Jerome Powell. Over the years, there have been many missteps by the Feds in attempting to inform the actors, and admirably have significantly improved their messaging. This year the Feds have been very clear about their intentions to slow inflation with a steady rate hike policy. They announce their concerns and intentions at Senate hearings, interviews with the actors themselves, and on their website.
This year the committee members and Jerome Powell have never been so clear about their intentions and strategy, which is to raise the discount rate to slow inflation. The Federal Open Market Committee (FOMC) meets eight times a year (every six weeks because they march to their own schedule), which has resulted in multiple rate increases at no surprise to anyone listening to them. On November 3, Jerome Powell stated in his speech most of the same message as early this year also posted on the Board of Governors of the Federal Reserve System website stating:
“Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.”
The committee raised the discount rate another 0.75% to 3 ¾% to 4%. He repeated their rationale and the parameters of future decisions, to no one's surprise, stating:
“In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt, and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective.”
The actors the next day and for the next three trading days hoe hummed his message, and their opening act announcements were played out with the disappointing drama of someone being told what they need but don't want. This is because the opening actors want to announce exciting, profound news so market participants and Wall Streeters, as investors, will react with energetic and unusual buying and selling activities. Overreacting investors also help script the next day's opening announcements, such as, “investors run for the exits aggressively selling stocks over concerns of the Feds!”. Even though nobody, including the Feds, wants or intends to cause a recession.
However, there is more to the Fed's November message that seems to have been missed by the opening actors and many others that perform for us on the financial market theater stage. The Feds in November, for the first time this year, stated:
“The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.”
The committee would be prepared to adjust the stance of monetary policy as appropriate risks emerge?!? How did the actors miss this key change in their message? I am willing to bet the Feds are glad. The Feds' greatest concern now is Wall Streeters overreacting to when the Feds begin slowing their rate policy. The Feds know Wall Streeters are a very skittish emotional group who have been whining all year of the pain of the Fed's discipline in raising interest rates in the best interest of everyone. If the opening actors had walked out on stage the next day after Mr. Powell's statement with great joy, enthusiastically announcing, “The Feds are stopping their rate hikes! “(they always exaggerate), the Feds' worst fears would have come to fruition with a frenzy stock market rally. But somehow, the actors missed this.
Comically, even though the intellectuals missed the Feds' clear November message of the possibility of slowing their rate hike policy, last Thursday, the opening actors came out gleefully announcing that “inflation is slowing!” What they were referring to is the Bureau of Labor Statistics (another curious group) reporting that their Consumer Price Index increased at a slower pace. Econoday, one of the more reliable actors compared to the other actors, provided their analysis stating,
“Inflation data brought some relief, with monthly consumer price gains steady at 0.4 percent in October. Prices were up 7.7 percent year-over-year, down from 8.2 percent the previous month. Forecasters in an Econoday survey had anticipated an acceleration in inflation with price gains of 0.7 percent on the month and 8.0 percent year-over-year, with the lowest estimate at 7.8 percent. At 7.7 percent, the 12-month inflation rate is the lowest since January.”
Most notably, October was the fourth consecutive month of slowing price increases.
This energized Wall Streeters because everyone knew this was the precursor to the Feds slowing their rate hiking (even though that's exactly what the Feds said a week earlier). Nonetheless, Wall Streeters responded predictably with the frenzy buying that shot up stock prices for the next two days at a pace not seen since March 2020. Thursday and Friday, NASDAQ rallied 9.71%, the S&P 500 6.49%, and lagging way behind was the turtle Dow Jones Index up 3.32%.
Fortunately, and probably to the relief of the Feds, Wall Streeter's enthusiasm waned over the weekend, or more likely, were resting, being out of shape and exhausted from the previous week's sprint. So far this week, the financial market stage has been a bit quiet with the resuming of mild boring open act announcements and recovering Wall Streeters with average buying activity, all wondering what the Feds will do in December.
What Does This Mean to Me?
Wall Streeters are an eclectic collection of people from all walks of life, education, wealth, and emotion. Among these groups are die-hard doom and gloomers to wild speculators always ready to take inconceivable risks. We like to consider ourselves a part of the more fun and optimistic group of Wall Streeters. In our announcements during our time on the stage (we were once for many years on the big stage of CNBC, now performing specifically for you), we like to focus on the opportunities and positive aspects of the financial markets.
However, we don't ignore potential risks and will report to you the moment we believe you may be in harm's way. We have done this many times in the past, most notably in 2006, of concerns of a 2008 recession that turned out to be very fortuitous for our clients and us.
We maintain our favorable view of the stock market and economy. We believe patience will be rewarded when market conditions improve. You will know the market trends are turning positive when the open actors are smiling – a key giveaway. In the meantime, sleep in and watch reruns of the open announcements.
Give us a call or send us an email if you would like to have a 15-minute free consultation. We welcome the opportunity to be of assistance with your goals.