January 19, 2019

For the Fed, There's No Pleasing the Stock Market

“It’s clear that no matter what the Federal Reserve and Chairman Jerome Powell did and said at the final monetary policy meeting of the year, they couldn’t make stock investors happy. Despite the Fed doing what had been expected, which was boosting interest rates for the fourth time this year and cutting its 2019 forecast to two hikes from three, the S&P 500 went from being up as much as 1.54 percent to down as much 2.25 percent.

The Fed’s decision should have been good news for stocks, as any more of a dovish tilt would have raised concern that the Fed sees the economy deteriorating much faster than thought. East West Investment Management Co. market strategist Kevin Muir captured the zeitgeist in a blog post before the Fed’s statement when he wrote that “the market has talked itself into believing the Fed will err on being dovish, so the bar has been raised for Powell’s performance.” Perhaps, but the reality is that the equities market has been on a steady decline since early October and the path of least resistance, especially with the year rapidly coming to an end, is lower. What we know is that the stock market is poised to set its low for the year in December for only the sixth time in the past 91 years. When that happens, stocks are typically either in a long-term downtrend for a large part of the year or break violently lower in December, according to Bianco Research. This is significant because when this happened in the past, the following year was not a good one for equities. Recessions occurred in four of the five subsequent years and stock returns “were nothing short of a disaster,” according to Bianco, with losses averaging 18.4 percent. The lone exception to a recession was 1941, when the Pearl Harbor attack caused the market to drop to a new low that December. While 1942 did not experience a recession, stock returns suffered for the first half of the year before rebounding to end 12.4 percent higher.”

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