Monday February 5th was the first day on the job for Jerome Powell as the new FOMC chair. He was greeted with a near 1,000 point drop in the Dow Jones Industrial Average, approximately a 3.9% decline. This was on the heels of a 540+ point drop on February 2nd (a 2.1% decline) and was followed by another 1,000+ point drop (a 4.2% decline) on February 8th. These changes put the Dow (and S&P 500) in “correction” territory, meaning a fall of 10% or more from recent highs. As of now, the Dow and S&P 500 are both still down nearly 7.5% from all-time highs.
The reason for the recent correction could be one of (or a combination of) several factors, including a risky volatility product, a fear of faster wage and job growth than expected, or that recently passed tax cuts might work as expected and result in an overheated economy. Some even believe that the tax cuts and spending increases might result in a “hard landing” for the economy.
As some evidence for the “hard landing”, it appears that interest rates are rising faster than expected as the easy money era comes to an end. This is all reminiscent of the “taper tantrum” of 2013, when the Fed was “winding down” asset purchases. The market did not react kindly to the slow down (and ultimate end) of quantitative easing. Ultimately though, the economy was able to withstand the slowdown of asset purchases without experiencing a recession.
The final point to consider is the relationship between the economy and the stock market. The two are simply different things. Equity markets are a measure of a portion of the expectations of the overall economy.
Questions you might want to consider
- Focusing on the economic reasons for the recent correction, do you believe that the central bank will raise rates faster than they might have previously considered doing? Are we at risk for a “hard landing”? Has the Fed offered any insight on this since Powell took over?
- Inflation in the US has largely lagged behind the medium-term goals of the Federal Reserve. Ultimately though, the goals of quantitative easing might have been to inflate asset prices, rather than goods prices. Consider the difference between asset price and goods price inflation. Is there a greater purpose to stoking some asset price inflation? Examine the role of the Fed in rescuing the banking system in 2008-2009.
- While interest rates spiked during the “taper tantrum” in 2013, the economy remained on a relatively even keel. This time might be different. Do you believe the economy is really as healthy as we say it is? I encourage you to look back at some indicators in late 2007, or early 2008 for help. The last recession began in 12/07, well before the financial markets collapsed in 2008. What do real time indicators say?
- Write your thoughts on anything here that relates to the Fed, asset prices, goods prices, interest rates, Fed politics, Fed policy, and new or old policy. Do not try to cover all topics.