As stocks fell for a fifth consecutive day Wednesday, investors thought they’d hear words of encouragement from Federal Reserve Chairman Jerome “Jay” Powell.
After all, one of his predecessors, Alan Greenspan, was behind “the Greenspan put”—the message (nod, nod, wink, wink) that if market conditions got rough, the Fed would stay steady or cut rates to put a floor under the market.
That policy mostly continued under Ben Bernanke and Janet Yellen. Bernanke, having barely survived the financial crisis and Great Recession, was understandably cautious. So, when his hint that the Fed might stop buying securities triggered a “taper tantrum,” Bernanke held off. The Federal Open Market Committee (FOMC) didn’t raise rates once during his tenure.
Yellen was only slightly less cautious: She waited until December 2015 to raise fed funds above zero for the first time in seven years, and raised it only five times during her tenure, despite an economy that was growing nicely.
Jay Powell, however, is taking a different path.
Few Americans today remember William McChesney Martin, Jr., the longest-serving chairman of the Federal Reserve in history, having held the post from 1951 to 1970 under five presidents.
But it was Martin who, in a 1955 speech, said the Fed “is in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up.”
The current Fed chairman, Jerome Powell, seems to have taken those words to heart. The statement following Thursday’s meeting of the Federal Open Markets Committee (FOMC), the Fed’s rate-setting body, used some variation of the word “strong” four times in its first paragraph. It went on to say that “further gradual increases in the…federal funds rate will be consistent with sustained expansion of economic activity…”
There has been talk of “gradual” rate hikes since Janet Yellen was Fed chair. But after an eight-session-long rally that drove the Dow Jones Industrial Average up around 1,850 points and the S&P 500 up 170, oints, the FOMC’s statement—plus more uncertainty on trade–triggered profit taking on Friday.
Apparently Wall Street believes Powell is serious. Is he?
This week started off with doom and gloom.
At Monday’s close, the Dow Jones Industrial Average was down around 9% from its all-time closing high in October, while the S&P 500 had fallen 9.9% from its peak, just shy of the 10.2% February-April correction. That would have been the second official 10% correction within nine months, a rare occurrence.
But instead, stocks rallied big for three straight days. The Dow tacked on almost 1,000 points from Tuesday through Thursday’s close, and the S&P gained 100. The Nasdaq Composite index, which already was in an official correction (off 13.1% from its all-time high), advanced more than 5%.
The rally’s causes ranged from an oversold market through President Trump’s positive comments on a potential trade deal with China’s President Xie Jinping (though these were vague enough to be chalked up to pre-election posturing).
On Friday, there was more good news as the economy added 250,000 jobs in October, while the official unemployment rate remained at a decades-low 3.7%.
Yet by mid-afternoon, stocks were selling off again on Apple’s disappointing sales and earnings forecast and as investors realized a strong job market with 3.1% annual wage growth was likely to produce more rate hikes from the Federal Reserve.
So, is the three-day party over?
It seemed inevitable that after six consecutive days of declines, stocks would bounce back strongly. And they did.
On Thursday, the Dow Jones Industrial Average soared more than 400 points, or 1.6%. The S&P 500 index rallied almost 50 points, and the Nasdaq Composite skyrocketed 200 points or almost 3%.
Alas, it didn’t last. Late Thursday afternoon, Amazon reported record third-quarter profits, but slowing revenue growth and holiday-season sales projections that were much, much lower than Wall Street had projected.
Down, down went the stock, plunging 8% in after-hours trading. Alphabet, parent company of Google, followed suit, losing 4% of its value after it reported strong earnings but slower sales growth.
Asian markets sold off Friday, followed by Europe and the Nasdaq Composite opened sharply lower—and why wouldn’t it, as two of its great bellwethers reeled. The Nasdaq, Dow and S&P 500 closed down sharply Friday.
So, how low can we go?
Since last week’s big sell-off, stocks have been almost literally up one day, down the next, and so on and so on.
As of last Thursday, the Dow Jones Industrial Average and the S&P 500 had both lost more than 6% from their early October all-time highs, while the Nasdaq Composite index had slid nearly 10% from its late August record peak—almost in correction territory.
Stocks bounced back Friday, sold off again Monday, rallied big time on Tuesday, and stayed there Wednesday before plunging again Thursday and closing mixed on Friday, with the Dow up and the S&P closing lower for the tenth time in the last 12 trading days. After all the ups and downs and to-ing and fro-ing, all three indexes are slightly above last Thursday’s lows.
The putative cause for last week’s selloff: rising ten-year Treasury yields, which topped out at 3.23% on October 8th. (The closing yield Friday was back to 3.20%.) This week, well, just blame the Fed.
Over the past week, the stock market has been hit by a hurricane.
Since reaching their all-time highs October 3rd, the Dow Jones Industrial Average gave up nearly 1800 points (or 6.6%) and the S&P 500 lost 200, for a 6.9% decline at Thursday’s close. The Nasdaq Composite index was off 175 points, or 9.6%, from its August 31st peak.
On Friday all three indices rallied nicely into the close as investors picked through the rubble for bargains. Clearly the Dow around 25,000, the S&P near 2,700 and the Nasdaq in shouting distance of 7,000 again were too tempting for bottom fishers to resist.
The selloff began with some remarks by Federal Reserve Chairman Jerome “Jay” Powell suggesting the economy was very strong and the central bank would keep raising short-term rates at a steady clip. It was a restatement of what’s been Fed policy for the past couple of years, but traders professed to be surprised. They sold off the ten-year Treasury note big time, sending its yield soaring to 3.23%, its highest in 7 ½ years.
The sudden jump in yield—it had settled back to 3.14% Friday—led to a mini-panic among investors who dumped both stock and bond ETFs. The Nasdaq lost almost enough to be in official correction territory (down 10%), while the Dow and S&P are well on their way.
So, is the worst over?
As of mid-week, the stock market was cruising along, with the S&P 500 poised to top its September 20th all-time high of 2930.
Then along came bonds—and Federal Reserve chairman Jerome “Jay” Powell.
At the Atlantic Forum, Powell told interviewer Judy Woodruff of the PBS News Hour, “The really extraordinarily accommodative low interest rates that we needed when the economy was quite weak, we don’t need those anymore…We need interest rates to be gradually, very gradually moving back towards normal.”
This was really nothing new—Powell and his predecessor Janet Yellen had said the same thing many times. But immediately, bond traders went into a selling frenzy, and the yield on the ten-year Treasury note, which had hovered above the magic 3% threshold, soared: As of Friday, the ten year yielded near 3.25%, its highest since June 2011. (Yields move in the opposite direction of bond prices.)
The Dow Jones Industrial Average plummeted 200 points Thursday and closed down another 180 points Friday. The S&P was off by almost 50 points, and the Nasdaq Composite index had plunged over 250 points in the week’s trading.
Is this a real danger for stocks?
On Thursday, the nation was transfixed by the searing spectacle of Dr. Christine Blasey Ford and Judge Brett Kavanaugh’s conflicting testimony before the Senate Judiciary Committee over Dr. Ford’s allegations that he had sexually assaulted her while both were in high school. (On Friday, the Committee voted 11-10 to confirm Judge Kavanaugh to the Supreme Court, and the full Senate will vote on the nomination next week, after a possible FBI investigation.)
But while time stood still in the rest of the U.S.A., it was business as usual on Wall Street. The S&P 500 index, the Dow Jones Industrial Average and the Nasdaq Composite index all posted modest gains on fairly light volume. The three indices were mixed on Friday, and remain close to their all-time highs.
Earlier in the week, stocks slipped a bit, but not much, from last week’s all-time Dow and S&P highs as talks broke down in the trade and tariff war between the U.S. and China, the world’s two leading economic powers.
On Wednesday the Federal Open Market Committee (FOMC) raised the federal funds rate for the third time this year, to 2-2.5%, and signaled it would raise rates again in December. And oh, yes, the yield on the ten-year Treasury note hit 3.1%.
Months ago, any one of these developments would have caused a big sell-off. Not this time. What’s different?
On Thursday, the Dow Jones Industrial Average rallied more than 250 points, notching its first record close since January 26th, at 26,656.98.
That marked the end of a nearly eight-month correction. The S&P 500 also hit a new all-time closing high of 2,930.75.
The Nasdaq Composite index, while gaining 1% on the day, was the only one of the U.S. Big Three benchmarks not to close in record territory. But it still finished the day above 8,000, only 80 points (or 1%) below its own late August all-time closing high. (The Dow and S&P continued to advance Friday while the Nasdaq slipped a bit.)
This comes the same week President Trump ratcheted up the trade war with China and threatened to put tariffs on all $500+ billion worth of Chinese imports if progress is not made in negotiations. Right now, those talks seem to be going nowhere.
It also comes in what is statistically the worst month for stocks by far: According to Yardeni Research, the S&P 500 averages a loss of 1% in September; the only other months that are in the red are February and May, which have average losses of only 0.1%.
So, what does that mean for investors?
Ten years ago the world ended. Only it didn’t.
On Monday, September 15, 2008, Lehman Brothers, founded in 1844, shocked the world by filing for Chapter 11 bankruptcy protection.
Over a frantic weekend of negotiations, the U.S. Treasury and Federal Reserve had failed to come up with either a rescue package or a buyer, so the fourth largest firm on Wall Street, with 25,000 employees, simply disappeared.
In the following weeks, the Fed and Treasury reversed course and bailed out insurer AIG and mortgage giants Fannie Mae and Freddie Mac, with help from a panicked Congress, which authorized $700 billion to purchase toxic mortgages securities from financial institutions under the Troubled Asset Relief Program (TARP).
To say those were scary days is a huge understatement. During the 1987 stock market crash, we worried it would be a repeat of 1929. Turned out the 1987 crash was the only bear market not followed by a recession since World War II. But 2008 was the real deal—a stock market crash, financial crisis, and a recession that was the biggest since the Great Depression.
What did investors learn from this near-death experience—or what should they have learned?