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Affluent Christian Investor | February 19, 2019

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Once Again, the Fed Drives Stocks Higher

Janet Yellen (Photo by Bill Clark / Getty Images)

Janet Yellen
(Photo by Bill Clark / Getty Images)

What a difference a week makes. Friday before last, gloom and doom ruled the markets. The S&P 500 had plunged 3.5% in just one week. Investors were dumping stocks apparently because they had somehow become convinced that low oil prices were a bad thing. Last week, it was an entirely different story. Last week the S&P 500 surged 3.4%, coming very close to its all-time high. And it wasn’t because oil prices went back up. So what explains the sudden change in mood? Well, the only material difference between last week and the week before it is the FOMC statement.

That’s right folks, we’ve just witnessed yet another Fed-induced rally. As Gomer Pyle used to say, “Surprise. Surprise. Surprise!” Once again, the Fed assured investors that it was in no hurry to raise interest rates. However, this time it played a little linguistic gymnastics. In previous statements the Fed had said that it would maintain its policy of targeting zero percent to 0.25 percent for the fed funds rate for a “considerable time.” This time the Fed said that it can be “patient.” Then it proceeded to explain that “patient” and “considerable time” basically meant the same thing. In other words, the Fed changed the wording, then it made sure that everyone understood that nothing really changed. The Fed was saying that investors don’t need to fear an increase in interest rates any time soon.

Stocks, which were already up quite a bit before the statement came out, surged even higher after the statement was released. Interestingly, the Fed also said that economic activity, labor market conditions, household spending, and business fixed investment are all improving. These are valid reasons to end the Fed’s emergency policy and move rates a little higher. But then the Fed expressed concern once again about the lack of inflation. Quite amazingly, the Fed actually blamed low inflation on falling energy prices. This is extremely odd. After all, in years past, when energy prices were rising, the Fed preferred to focus on core inflation (i.e., inflation excluding food and energy). We were told repeatedly in the past that inflation really wasn’t so high if we just ignore food and energy prices. But now that energy prices are falling, why is the Fed focusing on headline inflation? Why does the Fed ignore energy prices when they are going up, but worries about deflation when energy prices are going down? It couldn’t possibly be because the Fed’s primary objective is to prop up the stock market, now could it?

Of course, I can’t really complain that stock prices are rising. Like most investors, I am long and my portfolios are benefiting. Yet I can’t ignore the fact that Federal Reserve policy has been the biggest driver of stock prices. This has been one of my biggest worries throughout this prolonged bull market.

Read Vahan’s blog at Janjig.com.

 

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