Everyone is focusing on the Fed's 'gloomy' economic outlook from last night, but his commitment to the market was incredibly bullish for stocks.
The stock market took a turn for the worse this morning as traders digested yesterday’s Federal Reserve statement. The Dow Jones Industrial Average (DJIA) crashed nearly 1,000 points at the open.
But why? Powell’s commitment to hold rates at zero for two years and continue QE is mega bullish for assets. CNBC’s Guy Adami said traders might take a day or two for the market to read between the lines.
I’ve seen this movie before… [After a Fed statement] you have a down day in the market only to be followed by some huge monster rip on the next day in some sort of delayed reaction.
Following a vicious overnight sell-off in U.S. stock futures, the Dow careened lower when the markets opened. As of 9:35 am ET, the DJIA had lost 858 points or 3.18% to dive to 26,103.
The correction is perhaps a healthy retrace after a euphoric rally that lured in a wave of retail investor FOMO.
The S&P 500 fell 2.24% to 3,114.75, and even the unstoppable Nasdaq took a breather. The tech-heavy index dropped 1.48% after closing at record highs above 10,000 yesterday.
Here are the only words that mattered to stock traders in Powell’s statement last night.
We’re not thinking about raising rates. We’re not even thinking about thinking about raising rates.
This is as good as it gets for Federal Reserve commitments. You almost never get a two-year forecast on rates from the Fed chairman himself. It just doesn’t happen.
Even Former Federal Reserve Bank of Atlanta President Dennis Lockhart said he’s rarely seen a central banker so resolutely committed to supporting the markets:
[Powell was] even a bit more animated than typically a central banker is in emphasising that the Fed is going to stay the course here.
There should be no question, he added, that Powell will be there with stimulus when required. That’s as bullish as it gets for the market.
Most news outlets were quick to jump on Powell’s ‘gloomy’ economic forecast as he admitted that recovery would take a long time. Some traders may initially have panicked at this. Karen Finerman at Metropolitan Capital admitted the economic reading was:
A little more downbeat than I thought.
But if we’ve learnt one thing since the March selloff, it’s that the stock market isn’t the economy. The stock market is a discounting mechanism that looks to the future. And Powell just delivered a two-year, zero-interest, crystal ball to the financial markets.
Whether or not it’s the right policy, CNBC’s Tim Seymour said this is what investors like to see:
As a market participant, this is just what we’ve been fed for the last five years… As long as the Fed is in here like this, this is exactly what you get.
Boeing (NYSE:BA) continues its multiday slump, dragging 10% in early morning trading. The renewed threat of a longer ‘return-to-normal’ is hampering travel stocks, airlines, and retailers this morning.
Financials also suffered, with Goldman Sachs (NYSE: GS) and JP Morgan Chase (NYSE: JPM) falling 3.9% and 5.5%.
Even tech stocks are struggling in today’s selloff. After reaching new all-time highs yesterday, Apple (NASDAQ: AAPL) and Microsoft (NYSE: MSFT) are cooling off, down 1% and 2.3%, respectively.
Last modified: September 23, 2020 1:59 PM