After turning in one of its best January-April performances in more than 20 years, the stock market has suddenly run out of gas in May. We’re nowhere near correction territory – the S&P 500 is down about 2% so far this month after climbing more than 18% in the first four months of the year, and up 22% since the Christmas Eve bottom. Yet the financial press has been filled with “sell in May and go away” stories, citing the Wall Street urban legend – or historical trend, take your pick – that all the money that’s going to be made this year has already been made, so you may as well cash in your winnings and sit out the rest of the year.
The major impetus behind the dip – which doesn’t even meet the definition of a “dip” yet since few people seem to be buying on it – is President Trump’s announcement that he has upped the ante on the trade war with China, raising worries that talks between the two countries will collapse. The recent spate of high-profile IPOs from Lyft, Uber, Pinterest and other companies is also signaling that the stock market may have peaked.
Which raises the question: Is the Powell Put going to come to the stock market’s rescue again in the near future? How deep will a drop in the stock market – assuming it keeps dropping – have to get before the Federal Reserve intervenes and cuts the federal funds rate?
While the idea of a rate cut seems preposterous, with the economy rebounding to a 3.2% annual rate in the first quarter and the jobs market humming along at its strongest pace in decades, the Fed doesn’t seem to be including that in its calculations. Rather, it says its sole focus and concern is on the inflation rate, which remains stubbornly below its 2% target despite the strong economy. And that being the case, the Fed’s inclination and public comments seem to be leaning more toward a rate cut than a rate increase, which given the booming economy and stock market would seem to be the wrong thing to do.
Then again, You Know Who and now even Vice President Pence are calling for the Fed to cut rates – by a full percentage point, no less! – While the stock market always wants cheap money. Will the Fed give in once again?
Last week Patrick Harker, the president of the Philadelphia Fed, garnered some headlines when he wandered off the reservation and said he expected “to see one [rate] increase at most this year; possibly one, at most, next” year. However, he also hedged his bets by declaring that the low level of inflation might cause him to change his view. “If any component of the outlook were to affect my view on the appropriate path of monetary policy, it would be inflation,” he said. Harker doesn’t currently have a vote on the Fed’s monetary policy committee.
But Fed Vice Chair Richard Clarida tried to downplay the idea of an imminent rate cut or a rate hike for that matter.
“We don’t see a strong case to move rates in either direction,” he told Bloomberg Television. “I would not undergo heroic efforts -- including rethinking our monetary policy framework, or significant monetary policy stimulus -- in order to edge 1.8% [inflation] up to 2%.”
That comment illustrates how silly the Fed’s obsession with what it believes to be too low inflation has become. Are the members of the FOMC really wrestling over how to raise the inflation rate by two-tenths of a percentage point when they haven’t been able to do it in about 10 years, even though the unemployment rate is at a record low?
The Fed really needs to get away from its preoccupation with trying to raise inflation – a ridiculous canard in the first place – and focus instead on what’s really going on, like a stronger-than-expected economy that can handle an interest rate rise or two, which would take some froth off the stock market by allowing it to self-correct. However, this Fed doesn’t seem to be able to exert its independence – despite what it says – and ignore political and market pressure and get back to normalizing monetary policy when conditions are allowing it.
That being the case, I think the next move we can expect from the Fed will be a rate cut, sooner rather than later, perhaps, depending on how the trade talks with China go. Clarida hinted that if a trade deal “is not the outcome, then we’ll certainly take that into account in future policy,” which sounds like a rate cut to me.
So if you’ve already taken your profits and gone away for the year, or are planning to, you may want to wait around and see what the Fed does next.
Visit back to read my next article!
INO.com Contributor - Fed & Interest Rates
Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.