Caffeine Needed

Caffeine needed. Stocks posted a moderate rise yesterday as investors lacked the conviction to sustain an early-day rally.  Technology rose to the occasion helping to prevent further losses for the indexes.

N O T E W O R T H Y

Show me the way.  The Fed’s Federal Open Market Committee met to discuss monetary policy yesterday, and all eyes turned to the Central Bank… even though it was a closed door meeting.  Back in the olden days (like the 1980’s) when I cut my teeth on Wall Street, Alan Greenspan, the then Chairman of the Fed, was a powerful figure.  For a bit of context, the Fed Funds rate hovered between 6% and 8%! Anyone who talked of rates at 0% would be laughed at.  A mention of negative interest rates would land you a visit to a doctor to have a head examination.  A little more context is needed.  Before Greenspan took the helm at the Central Bank, Paul Volcker served as its Chairman under Jimmy Carter and Ronald Regan.  If you are old enough, I am sure you know where this is going.  Under Jimmy Carter, inflation skyrocketed and economic growth faltered in the US.  That condition, most feared by economists, is called stagflation. The term is still used these days but mostly to elicit fear of what could happen if the Fed fell asleep at the wheel.  By 1980, inflation topped 11%, which makes today’s 1.3% figure appear, well… not so bad at all.  In order to tackle those high rates of inflation in the 1980s, the Fed raised Fed Funds rates to almost 20%!!  Moves back then were frequent, large, and mostly unexpected.  The bold moves pushed markets in all sorts of directions.  For even more contrast, back then less than 10% of households even owned computers and there was no internet yet.  CNN was only launched a few years earlier (1980) and FNN (the predecessor to CNBC) was launched in 1981. The Wall Street Journal was the place for you to get information about the markets and the economy.  You could always call up your broker on a landline.  I am pretty sure you didn’t own a cellular phone in the 1980’s but if you did you would probably recall that they were only useful as a status symbol with the parking staff.  At this point you are either stressed or smiling as you reminisce about those days of yore.  Anyway, back then if you wanted to know what the Fed was up to, you would have to wait at the Federal Reserve Bank building in Washington, DC to listen for the FOMC announcement to be read aloud.  Wall Street always had a person on the job to relay the information to the trading desks, which took advantage of the timely news, though the effects only often lasted for minutes if not seconds.  If you were really ambitious and unwilling to wait for the results to be read, you could sit out in front of the bank and watch Alan Greenspan show up to the meetings.  That was a thing… really!  Traders believed that if Greenspan’s briefcase was full of papers, he was most likely going to lower rates.  We are not talking Gordon Gecko – Bud Fox stuff here, just plain old voyeurism. Well, it really was a thing, and I am pretty sure that few, if any, were able to profit on it.  Turn the clock forward to today, where we are armed with technology, media, and close access to the financial markets.  We expect information to come at the speed of light and to be accurate.  Interestingly, the Fed still meets behind closed doors and we have to wait until they conclude their deliberations to hear the policy, though the statement is now released electronically.  Inflation has remained in the single digits since the mid-80s and the Fed has added a new mandate: low unemployment.  With their duel mandate, you can see why the body remains important.  In the wake of the financial crisis, the Fed began to introduce new tools to spur employment, namely quantitative easing, in which the Bank directly purchased securities.  With this latest economic calamity, the Fed has asserted itself yet further adding an unprecedented barrage of monetary stimulus.  Folks, the Fed is really important to the health of the economy… and to the markets. If you want to know what they will do next, you don’t have to camp out in front of the bank in DC, you simply need to listen to the Chairman and his committee members.  One of the policy tools adopted by the Fed in recent years is forward guidance. The Fed realized that by simply warning investors about what they might be doing in the months ahead could affect the markets. How surprising.  Utilized properly, forward guidance could minimize market volatility and normalize economic activity.  In these unprecedented times, the Fed is on the search for more ways to stimulate and they have been leaning on forward guidance as a tool.  Many are expecting the Fed to provide guidance that goes even further into the future.  For example, knowing that rates will be near zero for the next few years might have a positive impact on the economy and help corporations along with consumers plan and increase purchases. Further, knowing that the inflation that may result from the economic recovery might be allowed to go higher than the Bank’s prior target, may further bolster the case for low rates over a longer period of time.  These have been the Fed’s latest and greatest monetary policy tools. This afternoon, the FOMC will release their policy statement and follow it up with the Chairman’s press conference.  Many economists are expecting more aggressive forward guidance, more clarity around the average inflation target, and a dovish Dot Plot (rate forecasts by FOMC members).  This will be the Fed’s last meeting before the elections, which will make it that much more closely watched.  If you prefer to go old-school and drive down to DC, the Bank is located on K Street NW.  I know some great cafe’s in the area.

THE MARKETS

Stocks closed slightly higher yesterday as investors awaited the Fed’s final policy statement before the elections, due this afternoon.  The S&P500 rose by +0.52%, the Dow Jones Industrial Average added just +0.01%, the Russell 2000 traded up by +0.08%, and the Nasdaq Composite Index climbed by +1.21%.  Bonds slipped and 10-year treasury yields were unchanged at 0.67%.

NXT UP

– Retail Sales (Aug) is expected to show a monthly gain of +1.0%, down slightly from the prior month’s +1.2% growth.

– NAHB Housing Market (Sept) is expected to have remained constant at 78.

– The FOMC rate decision will be released at 2:00 PM EST.  The press conference that follows will be closely watched.

daily chartbook 2020-09-16