If You Think The Fed Has Your Back – Think Again!
There is a loud narrative that the Fed will not let the market fall
It is true the Fed unleashed enormous stimulus, but at levels 32% below today’s Dow Jones Index of 28133.
If you look at the Fed’s balance sheet, their stimulus of the financial markets ended months ago
When I was growing up in Massapequa, NY, I spent a lot of time at the Marjorie Post Park pool. The highest diving board was probably 10-12 feet high and looked into the 12-foot-deep end of the swimming pool. For some reason, in my 7-year-old mind, standing on that high board looking down seemed liking looking over the edge of a cliff. Nobody likes to jump off a cliff. Of course, once you jumped into the water, you realized it really was not that high after all and you raced to the ladder to climb up and do it again.
I think professional investors feel a little bit like I did standing on that diving board as a child. What professionals know that most day traders do not, is that there are powerful forces moving the market both up and down. One of them is the Federal Reserve (the Fed) and their monetary policies focused on interested rates and quantitative easing.
It seems hard to believe, but the Fed had their policy interest rate above 1.5% at this time last year. It is now set at approximately 0.10%. This part of their policy is the same. Interest rates are low for government and investment grade corporate borrowers, and likely to stay that way for a while.
The Fed’s balance sheet is a different story. After an initial burst of activity, the Fed balance sheet peaked in size on June 10th; this indicates the Fed is not expanding their holdings of bonds. Remember, quantitative easing is a policy where the Fed buys bonds from the dealers, giving them cash and hoping the cash will find its way to the real economy in the form of loans. The market understands this as an easing policy by the Fed, which is why stocks tend to go up when this policy starts. Despite their rhetoric of wanting to stimulate the economy, the Fed’s actions are showing us something different.
Market behavior and narrative are not tightly linked to Fed actions during a rally. It is fair to say that the Fed was unhappy over the state of the markets and economy in March and took action. Now, quietly, things have changed. The narrative that the ongoing Fed stimulus will continue to drive markets higher continues, despite a clear change in policy from the Fed itself.
While we are hopeful that the economy will rapidly return to normal, we also recognize that the markets are sensitive to changes in Fed policy. Fed policy has changed.
Robert Lloyd, CFA® is President and Chief Investment Officer of Lloyds Intrepid Wealth Management, and author of the book CENTRAL MARKETS. Since 1994, he has held positions as a trader, analyst, portfolio manager, and wealth manager while working at Invesco, CCM Opportunistic Advisors, and Merrill Lynch. In another life, he served 8 years in the U.S. Navy as a Naval Flight Officer flying in the S-3B Viking. For a complete resumé, visit his profile at LinkedIn.
Lloyd holds a BBA from the University of Notre Dame and an MBA from the University of Chicago.
Lloyd is a Chartered Financial Analyst.
Lloyds Intrepid LLC is doing business as Lloyds Intrepid Wealth Management. Lloyds Intrepid LLC offers investment advisory services in the State of Texas where registered and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. Lloyds Intrepid LLC and its advisers do not provide legal, tax or accounting advice. Lloyds Intrepid LLC formulates retirement plans, investment strategies, portfolio construction and investment due diligence for clients with signed investment advisory agreements with us. The information contained herein has been obtained from sources believed to be reliable, but the accuracy of the information cannot be guaranteed. All opinions and outlooks are subject to change.
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