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Implications Of Jerome Powell & The Feds Extended Dovish Stance

Daniel Laboe

The markets are catalyzed by yet another economic backstop that solidifies this market rally’s theme: Don't Fight The Fed. Federal Reserve released its fed funds rate dot plot chart (illustrated below) where FOMC participants are projecting that there will be no rate hikes until 2022.

Elongated Low-Interest Rate Impact

This interest rate projection is having a mixed impact on stocks. It is good news for high-growth tech firms that have been provided with a rare tailwind by the pandemic and are now able to discount their future cash flows at the lowest interest rates in history, making these companies more valuable from an analysts standpoint.

The growth-driven Nasdaq 100 QQQ is continuing to hit all-time highs with its biggest catalyzers being Microsoft MSFT, Apple AAPL, and Amazon AMZN. All three of these over trillion-dollar businesses closed at their own all-time highs.

This elongated low-interest-rate environment is hitting the banks hard. The KBW Bank Index was down over 6% today, with Bank of America BAC, PNC PNC, and Wells Fargo WFC, leading the charge downward due to their extensive interest rate exposure.

Jerome Powell said in his Wednesday speech that the GDP decline in Q2 is anticipated to be the worst in history. Inflation remains below the 2% target. Jerome and his band of dovish governors plan on maintaining their monetary stimulus levels but are putting the ball in congresses court, expressing that there will likely need to be more fiscal stimulus.

Jerome's overall outlook was bleak, stating there will likely be millions of Americans out of a job for years to come, and economic uncertainty is exceptionally high. Still, Fed Chair Powell said he is committed to utilizing all the tools available to him and the Fed to maintain an economic backstop.

The equity markets were all over the board going into the close as traders attempt to decipher what to make of Jerome Powell's speech. Nasdaq closed higher at another record close, but both the Dow Jones and S&P 500 Indices closed lower.

What Could Go Wrong? 

The markets have been trading higher on the positive unemployment figures, and optimism about a swift economic reopening across the US. The one thing that isn't being priced in is the enormous amount of risk associated with another wave of the virus.

The recent protests around the US will be a big test for a potential second COVID wave. A second wave would be devastating for the economy as it would extend consumer fears, and in turn, the economic downturn.

Retail investors continue to pour money into the markets on the implication that stocks do nothing but go up. Jerome Powell alluded to the idea that the markets need to assess their current risk/reward levels, and I could not agree more with this inclination. The current market risk/reward levels are atrocious, and I would be extremely cautious with my stock purchases.

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