Welcome to the Tantrum Zone
After stocks nosedived last Friday following hints that the Federal Reserve would raise rates, every word from Fed Governor Lael Brainard’s speech Monday were scoured, sifted and sniffed for meaning.
Fortunately, sulky investors received this pacifier: Brainard said the case for a preemptive rate hike was “less compelling.” For clarity, in Fedspeak that’s the equivalent of Ronald Reagan’s: “Mr. Gorbachev, tear down this wall.”
The relieved market performed a 30-point rally in the S&P 500 Monday, putting a dent in Friday’s painful 2.2% drop.
But while odds dropped that the Fed will raise rates at its next meeting, I don’t think the market has the all clear sign. Based on Friday’s tantrum we’re likely to see more selling fits each time there’s a mere hint of a rate increase.
We’ve been warning subscribers for weeks that the market was acting like an overtired toddler and meltdowns are inevitable. Friday was a perfect example that the market needs a long nap. Fed Chairwoman Janet Yellen made what we thought was a crystal clear prediction regarding the long term direction of rates a few weeks ago, but investors were jolted last Friday by comments made by two Fed officials. Boston Fed President Eric Rosengren and Fed Governor Daniel Tarullo both said that a rate increase would be a reasonable path to avoiding an overheated economy.
That was enough to cause S&P to drop 10 on the open and faltered another 20 points by lunch. By late afternoon the market was in full tantrum mode. It let loose its highest volume and most severe selling for the final hour, which left the S&P bludgeoned a painful 52 points by the close.
In addition to the semantic dissection of Fed Governor Lael Brainard’s speech, the timing was worthy of analysis. This speech was not on the Fed’s formal calendar, and as of early last week it was not a scheduled appearance. Just last Thursday, the Chicago Council on Global Affairs issued a press release announcing that Lael Brainard would be speaking on Monday.
Investors worried that the Fed, which has become increasingly sensitive about not surprising the market, was planting its last hint before the one-week quiet period that precedes its September 20 to 21 meeting.
Yet there was little need to panic. Brainard, a Fed policy dove (those that lean toward low rates and restraint on rate changes), expounded that the risk of strangling economic growth with higher rates outweighs the risk of inflation.
Regardless of the outcome of the Fed’s meeting next week, I expect volatility to pervade the market.
There’s no way to avoid breaking into a full sweat when your child throws himself on the floor of the supermarket because he can’t have that candy bar. But most seasoned parents agree that staying calm and carrying on can get you through even the most unnerving outburst.