Powell: “We May Go Past Neutral”

Fed Chairman Powell spooked the market again this week and that is not the first time he has done that this year. In a speech co-hosted by The Atlantic Magazine and the Aspen Institute, Powell made comments that sent bond prices tumbling and yields jumping.

Essentially he explained that he sees three stages for interest rates—accommodative, neutral, and restrictive.

Powell stated, “Interest rates are still accommodative, but we’re gradually moving to a place where they’ll be neutral. We may go past neutral. But we’re a long way from neutral at this point, probably.”

The comments were made Wednesday afternoon, just as the market was closing. The comments led to a big drop in index futures that night and a sizable selloff on Thursday morning.

For me, the comments were reminiscent of the now famous Alan Greenspan comment about irrational exuberance. When Greenspan made that comment in December 1996, equity markets around the world dropped sharply.

Personally I think Chairman Powell is doing exactly what we need a Fed Chairman to do. He is acting in accordance with the mandates Congress placed on the Fed and he is being very transparent about how he sees the Fed should proceed. The dual mandates from Congress are to seek full employment and to stabilize prices. Right now, the unemployment rate is as low as it has been in 20 years. The inflation rate has been rising modestly, but it is still below historical averages.

Some people are not happy with how the Fed is increasing rates and that includes President Trump. And I am sure there are investors that are permanently bullish that aren’t happy with the market reactions after Chairman Powell gives speeches.

JPMorgan Chase published a report this week that stated that Fed Chairman Powell has cost investors $1.5 trillion in losses this year. A team of analysts looked at the three news conferences that followed FOMC meetings as well as Congressional testimonies and prominent speeches.

According to the team at JPMorgan, the average decline after the three FOMC meeting news conferences has been 0.44%. After the other speeches or testimonies, the market has declined five out of the past nine instances with an average decline in the S&P 500 of 0.40%.

The report included a chart of the market before and after the presentations.

The research note did come with a disclaimer of sorts. The note stated, “While we acknowledge that it is not possible to attribute the market impact of each speech with certainty, simple math indicates that ~$1.5 trillion of U.S. equity market value was lost this year following these speeches.”

Again, if I were an investor that only played the market to go up, I wouldn’t be very happy about these findings. But investors should know by now that the market moves up and down and sometimes it moves sideways.

In the current market environment, the rally is almost 10 years old and it is already one of the longest bullish runs in history. If you are still fully invested in stocks and haven’t adjusted your asset allocation to have less exposure to equities that is your fault, not Chairman Powell’s.

There are times when you want to have more money allocated to equities, but I don’t think now is one of those times. The market is overbought and has been for some time. As I said before, it has been almost 10 years since the bear market low in March ’09. The sentiment is optimistic and consumer confidence is at 18-year highs. All of these things suggest to me that you should be lowering your equity allocation to protect against a decline in the overall market. You don’t have to move it to zero, but you shouldn’t have it at 100% either.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

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