The Stock Market: Volatility To Continue

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I stand by the title of my stock market post last week, “The Stock Market: Going Into A Higher Volatility Regime.”

The stock market closed down for its fifth week in a row and volatility dominated market activity.

Stock Performance for week of May 2, 2022 (Wall Street Journal)

The S&P 500 Stock Index has had its worth streak since June 2011, and the NASDAQ suffered its worst run since November 2021.

Kristina Hooper, the chief global market strategist at Invesco, is quoted in the Financial Times;

“There is an enormous amount of confusion in markets.”

The Federal Reserve raised its policy range for the Federal Funds rate by 50 basis points to 0.75 percent to 1.00 percent.

It also produced a short picture of how it was going to reduce the dollar value of securities in its portfolio of securities bought outright.

Wednesday, right after the announcement, stock prices rose dramatically.

On Thursday the markets turned around and stock prices fell substantially.

Stock prices fell again on Friday.

On Thursday, the Bank of England raised its interest rates, while at the same time forecasted that a “recession was in the offing.” Not too cheery of an outlook.

In addition, the yield on the 10-year U.S. Treasury bond closed above 3.0 percent at the end of the week. Treasury yields have not been this high for a long time.

Two Things

There are two factors that are, I think, very important in this picture.

First, there is inflation that seems to be filling the United States.

More and more, analysts are taking the recent increases in consumer price numbers as representing a major shift in how the U.S. economy is performing. James Masserio, co-head of equities for the Americas at Societe Generale, has gone so far as to claim that there has been “a generational shift in inflation.”

Inflation was very modest in the last period of economic expansion, 2009 through 2020. The compound, annual rate of consumer price inflation during this period was just under 2.4 percent.

For the twenty-five years before the Great Recession, which took place from December 2007 through June 2009, consumer prices increased only modestly from year to year

The growing feeling is that the new round of higher rates of inflation is going to take some time and effort to unwind.

The second point here concerns the Federal Reserve.

It seems as if no one appears to have any firm feeling of confidence in Fed Chairman Jerome Powell and his team at the Fed.

The direct evidence of this is that Mr. Powell came out and announced this past Wednesday that the Federal Reserve was raising its policy rate of interest by 50 basis points.

And, the stock market went up!

The Standard & Poor’s 500 Stock Index rose by 125 points!

This is not an insignificant rise.

Why did stock prices go up, when the Fed was making such a major increase in its policy rate of interest?

The market turned around on Thursday and Friday as Mr. Powell and others at the Fed made enough noise that they were really going to be serious about raising the Federal Funds rate further this year, bringing the rate up to around 3.00 percent by the end of the year and by shrinking the Fed’s balance sheet.

But, I am still not convinced that Mr. Powell has the confidence of investors when it comes to really keeping the Fed on track to fight inflation.

Mr. Powell has always been seen as one who is intent upon erring on the side of monetary ease so as to avoid any downside problems that might occur.

In fact, it is this belief that Mr. Powell errs on the side of monetary ease that has plagued Mr. Powell at every stage of his reign as Federal Reserve Chair.

“Analyst and investors offered multiple theories for the share gyrations (through the latter part of the past week), yet the main mood was one of disorientation.”

This Is Where We Are

So, on to the future.

But, what about the future?

The future is, highly uncertain.

I have even referred to the current state we are in as one of radical uncertainty,

The basic problem is the Federal Reserve.

The Federal Reserve has gotten itself “overly active” in trying to manipulate the economy.

One reads the analysis of the movements in the stock market this week and one continually comes back to what the Fed has done or what the Fed hasn’t done.

Yes, there are a lot of other things happening in the world today, besides inflation.

There are the events taking place in Ukraine. There is a rising, once again, of pandemic cases. There are still supply chain problems. China’s moves are unknown. And, so on and so forth.

But, it seems as if almost everything comes back to the Fed.

This is adding in a major way to the uncertainty that exists in the world.

This should not be.

Mr. Powell and the Fed have contributed greatly to the problems that the Fed is now facing and it seems to be very good at creating even more areas of uncertainty in everything it gets involved in.

The stock market is going into a higher volatility regime. This is what investors are going to have to deal with.