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The Powell Plunge: Fed Chair Tanks Stocks (Again)

By John Persinos on March 1, 2018

Beware the power of “Fed Speak.” Congressional testimony on Thursday by Federal Reserve Chair Jerome Powell helped torpedo stocks, as Powell suggested that the central bank would tighten more aggressively than originally thought.

The three main stock indices plummeted today, marking the third day in a row of losses. The prolonged slump began with Powell’s testimony on Tuesday.

President Trump’s announcement today of new steel and aluminum tariffs also soured Wall Street’s mood. If there’s anything the financial community hates, it’s protectionism. Tariffs would probably trickle down to consumers in the form of higher prices.

The Fed’s original intention was to raise interest rates three times this year, but traders are now betting on at least four hikes. Bull markets tend to die when rates rise.

Economic data released on Thursday made a fourth rate hike more likely. The Commerce Department reported that consumer prices as measured by the personal consumption expenditures (PCE) price index increased 0.4% in January. That was the largest increase since September and followed a 0.1% gain in December. In the 12 months through January, the PCE price index rose 1.7% after a similar gain in December.

The tightening job market is fueling price pressures. Separate data on Thursday showed the number of Americans filing for jobless benefits fell last week to the lowest level since 1969.

The Labor Department reported today that initial claims for state unemployment benefits dropped 10,000 to a seasonally adjusted 210,000 for the week ended February 24. Analysts had expected claims rising to 226,000. It was the 156th straight week that claims remained below the 300,000 threshold.

Also buttressing inflation worries was the latest report released on Thursday by the Institute for Supply Management (ISM). The ISM said its manufacturing index rose to 60.8% in February, up from 59.1% in January. That’s the highest level since May 2004.

Parsing Powell…

Powell’s two-day, semi-annual testimony to Congress began on Tuesday in front of the House. Powell delivered the second leg of his testimony on Thursday in the Senate.

Today in front of Senators, Powell underscored his previously expressed bullishness over the economy. And once again, he fueled concern that monetary tightening this year would happen faster than anticipated.

Investors tend to overreact at every utterance from whoever happens to be running the Fed. The fact is, Powell this week never promised a fourth hike in rates. He also stopped short of predicting how members of the policy-making Federal Open Market Committee (FOMC) would revise their economic forecasts when they meet in three weeks.

Nonetheless, Powell’s assertions that inflation is moving up to the Fed’s 2% target were enough to shake investors. Wall Street divined hawkish portents.

As Powell stated on Tuesday and again on Thursday:

“Fiscal policy is becoming more stimulative. In this environment, we anticipate that inflation on a 12-month basis will move up this year and stabilize around the FOMC’s 2% objective over the medium term. Wages should increase at a faster pace as well.”

The result: stocks fell on Tuesday, Wednesday and Thursday.

Brewing trade war…

Also weighing on stocks Thursday were renewed fears of a trade war. President Trump announced that he would impose aluminum and steel sanctions next week. Trump said he would set tariffs of 10% for aluminum imports and 25% for steel imports. The target is China.

Not mentioned amid the president’s “America First” rhetoric today was the fact that Trump in the past has purchased Chinese steel for his buildings. No matter. A hawkish Fed chief combined with tariffs equals a falling stock market.

Jerome Powell took the helm from former Fed chief Janet Yellen less than a month ago. The last several Fed chairs showed they were willing to take measures to calm markets if they grew too volatile. But Powell is an unknown quantity and investors are seeking clues as to how he will lead the central bank.

So far, Wall Street isn’t thrilled with what it’s hearing from the rookie Fed chair and former investment banker. Powell did try to sound a tad more reassuring today, by saying there was no evidence of a “decisive” move up in wages. But investors weren’t buying it; they still fear the taper. Add a brewing trade war to the mix. The CBOE Volatility Index (VIX), aka “fear index,” jumped about 12% today.

Powell’s testimony on Tuesday and Thursday came as JPMorgan Chase (NYSE: JPM) and Goldman Sachs (NYSE: GS) are predicting one more rate hike in 2018 than the Fed’s own policymakers projected in December.

February gave investors a wild ride. The Dow Jones Industrial Average crashed more than 3,200 points last month, or 12%, in just two weeks. March has picked up where a miserable February left off.

Thursday Market Wrap

  • DJIA: -1.68% or -420.22 points to close at 24,608.98
  • S&P 500: -1.33% or -36.16 points to close at 2,677.67
  • Nasdaq: -1.27% or -92.45 points to close at 7,180.56

Thursday’s Big Gainers

Analysts bullish on logistics firm.

Lender reports record revenue.

Tech firm’s earnings beat expectations.

Thursday’s Big Decliners

REIT misses on earnings, slashes dividend.

Analysts downgrade financial services firm.

Apparel retailer issues weak guidance.

Letters to the Editor

“This is in regard to your February 19 issue, Eat the Bear (Before the Bear Eats You). My problem is that I only have a 401(k) plan with five investment options: an S&P 500 index, a small-cap index, a bond index, an international index, and a cash index paying 2% interest. How would you divide that up to hedge the bear? There is no opportunity to buy gold.” — Michael B.

Investors of all stripes can benefit by following the latest recommended portfolio allocations of our flagship publication, Personal Finance. See the pie chart below.

Securities law prohibits me from providing customized, personalized advice to individuals.

I can tell you this, though: prudent investors should pare back their exposure to momentum growth stocks.

Stick to high-quality, reasonably valued stocks with inherent strengths that should hold them in good stead under a correction.

If investments pegged to precious metals are unavailable, consider inflati­on protected bonds. I’ve also advised using stop-loss orders for limiting the level of loss from a dropping stock.

Questions about portfolio allocations? Drop me a line:

John Persinos is managing editor of Personal Finance and chief investment strategist of Breakthrough Tech Profits.


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