Flash Market Update
Federal Reserve Chairman J. Powell served markets a dose of reality in Congressional testimony Wednesday afternoon. A reminder of the stark short term outlook for the economy and sobering news on interest rates have combined to send equity prices sharply lower yesterday morning.The surprise in Powell’s remarks was not that current and immediately upcoming economic statistics are going to be bleak, but that the Fed intends, at this juncture, to keep short term interest rates at or near zero until 2022. This was pessimistic news to the markets and threw cold water on recovery scenarios that had become increasingly optimistic after last week’s unexpectedly positive employment news.
The last several trading sessions have been somewhat shaky with only the NASDAQ Composite index continuing to forge significantly higher. Its new all-time highs at Tuesday’s and yesterday’s closes are the first by any broad equity index since mid-February.
The S&P 500 and the DJTMI posted their highest recovery levels on June 8 after both regaining roughly 80% of losses since the March 23 lows but today’s opening, down almost 3%, may have reversed that trend, at least for the near term.
It’s important to remember that while Mr. Powell’s comments were interpreted as chilling, the Fed is reacting, not predicting. It is entirely possible that the expectations the Chairman is building may not endure if the economy continues to snap back. A focus on current conditions is certainly not encouraging, but markets look forward and only seldom do they dwell on day to day minutiae.
Recency, a tendency to project current or recently past events on the future, is a trap into which we all can fall. The Fed, with all its myriad analysis tools, analysts and statistics is no more capable of seeing into the future than anyone else. Random events can always reduce the most capable sages to irrelevance.
A second virus-induced shutdown would likely put the economy and the markets into a tailspin. Indeed, talk of a second wave of Coronavirus infections has fascinated the press in recent days. Some news reports have suggested that crowds on Memorial Day in reopened states have triggered a new upsurge in cases.
As of Wednesday, we detect no material uptrend in new cases nationally. Individual states’ new case rates have largely leveled off and several other countries continue to see infections rise, notably Brazil, but it seems entirely speculative and imprudent to report that a new Coronavirus disaster lies ahead for the US. Notions or predictions of a second nationwide or even regional shutdown in our view are unfounded and unreasonable.
Since the March 23rd lows, the only new revelations have been that a trough in the economy’s contraction may have already occurred and that recovery could be far quicker than anyone envisioned. We see little reason to be overly concerned that the Fed is portraying a scenario the equity and bond markets have not previously foreseen.
Whether the downdraft yesterday morning is the beginning of a correction or pause in a longer uptrend is unknowable. What is certain is that markets discounted a disastrous second quarter with a six week plunge in February and March.
Byron A. Sanders
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