Federal Reserve Chairman Jerome Powell doesn’t strike me as a guy that likes to rock the boat. If anything, he follows the government mantra, “Not on my watch.” For several months, he didn’t want to be the guy that fueled a volatile reaction in the markets. He was the guy that avoided confrontation when President Trump attacked his credibility. But on Wednesday, he appears to be taking heat for comments that drove the U.S. Dollar sharply higher and U.S. equity prices sharply lower.
I find it funny that when Trump criticizes the Fed Chairman, professionals come to his defense by stressing the central bank is independent, but when the Federal Open Market Committee makes a decision and Fed Chair Powell backs with his reasoning, the markets run by these professionals say they are wrong. It appears to me that the markets want to influence Fed policy and not the other way around. And when the Fed does, and the stock market collapses then it’s their fault.
This is the second time in three months that stocks broke sharply because the outcome of the event they were betting on, did not materialize as planned. Remember back in early May, investors were heavily long on expectations of a trade deal between the United States and China. When trade negotiations fell apart and both sides upped their tariffs, this created uncertainty. And we all know investors don’t like uncertainty so they cut their positions.
Since the sell-off in May, the markets have more than recovered their losses. This was because investors latched on to the possibility of as many as three rate cuts by the Federal Reserve before the end of the year. Based on Powell’s comments, it looks like they may not get what they hoped for. But guess what, prices will retreat as investors shed their risky positions, but then they are likely to rise again when the markets hit value areas.
The price action in the stock market after Powell said the central bank’s rate cut approved on Wednesday was part an ongoing move to adjust to economic conditions though no guarantee of future cuts, looked like heavy algorithmic selling to me. I didn’t see a lot of across the board weakness in several of the major shares. I did see a lot of index selling. The way things unfolded, it appeared that traders had a bunch of rules like “If Powell signals a September rate cut, then buy stocks, and if he signals no rate cut, then sell stocks.” It didn’t look like this was the start of the next bear market.
Once conditions settle down and the major indexes reach value areas on the charts, I think we’re going to see renewed buying and probably new record highs by the end of the year. The way I see it, if the economy continues to weaken then stocks may feel some pressure, but short-sellers aren’t going to get too aggressive on the short side because they know the Fed will have their back.
This article was originally posted on FX Empire
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