Market pundits spend much of their time figuring out which set of events will form a bullish narrative for investors. If this week’s reaction to election results teaches us anything, it is that bullish investors can fit any market narrative to suit their purposes.
Heading into Election Day, markets were becoming increasingly comfortable with the idea of a “Blue Wave” – a Democratic sweep that would be likely to result in massive stimulus. It seemed odd to me that markets would openly root for an outcome that could lead to higher taxes, but markets focused on potential rewards while overlooking potential risks. In other words, greed outweighed fear.
The scariest outcome for markets was believed to be a razor thin election result that was likely to be challenged. That is exactly what we got. The race is still too close to call and the President is threatening a barrage of lawsuits to challenge vote counting and procedures. Yet markets have chosen to focus on the notion that potential Congressional gridlock is likely to keep taxes stable, remove the threat of regulation from huge tech stocks, and force the Federal Reserve to remain extraordinarily accommodative. After a 7.5% rally so far this week, it is fair to say that greed outweighed fear. Again.
Federal Reserve Chairman Powell will be holding a press conference at the conclusion of a 2 day Fed meeting this afternoon. That comes amidst the market’s current post-election party mood. Yet one of Mr. Powell’s predecessors, William McChesney Martin, once famously stated that the job of the Fed is “to take away the punch bowl just as the party gets going.” We will learn later today whether Mr. Powell is as much of a party-pooper as Mr. Martin.
Mr. Powell has to walk a fine line this afternoon. He and his colleagues have been quite clear that the Fed would prefer some fiscal stimulus to aid their efforts to boost the economy. With so little clarity about the coming political landscape, it is hard to imagine him taking a strident position in one direction or another. It seems most logical to expect talk about staying the course and Fed vigilance, and a strident avoidance of anything political. Will that be enough to keep the party going?
Finally consider the market’s reaction to each of this year’s regularly scheduled Federal Reserve announcements. I think you will notice a distinct patter in the immediate aftermath of the press conferences.
(I excluded the special announcements that were designed specifically to rescue plunging markets. Those efforts worked as planned)
Consult the charts below.
Announcement date: January 29, 2020
Announcement Date: April 29th, 2020
Announcement Date: June 10th, 2020
Announcement Date: July 29th, 2020
Announcement Date: September 16th, 2020
Source for all charts: Bloomberg
Disclosure: Interactive Brokers
The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
Disclosure: Futures Trading
Futures are not suitable for all investors. The amount you may lose may be greater than your initial investment. Before trading futures, please read the CFTC Risk Disclosure. A copy and additional information are available at ibkr.com.