Friends
As we alluded to last week, we have now seemed to enter the adjustment phase as it pertains to the Fed and monetary policy. Just the hint that the Federal Reserve may begin to take the punch bowl away sooner than later has sent the bond and stock market into somewhat of a frenzy (not to mention gold and commodities). Bonds now have seen yields on the 10 year Treasury note move from 1.60% to 2.60% in less than 2 months, while stocks have dropped 5% from the May highs. The speed of that move is what is upsetting markets. Market participants knew this day was coming, they just didn’t know when it was coming. The hope was that a smooth and calm hand off could happen from Fed policy to economic growth. We’ve always wanted a stock market built on a foundation of strong economic growth, rather than just easy money provided by the Fed. The easy money policy was going to have to end at some point.
Now, one could argue that the Fed really did not say they were going to take the punch bowl away yet at last week’s FOMC meeting. It doesn’t really matter. If traders and market participants interpreted the Fed statement as more hawkish than before, then perception is reality. We would expect Fed officials to attempt to alter what they seem to feel was an incorrect interpretation, as indeed a couple of Fed Governors did today, but it remains to be seen if they can put the Genie back in the bottle. The realization that the punch bowl will be taken away someday, whether sooner or later, has entered the psyche of the investment public. The transition was never thought to be an easy one. Volatility and disruption is likely going to continue as market participants sort this all out. As an addict dealing with withdrawal, markets dealing without easy money will be unsettling at first. But to get to the other side, markets are going to have to go through the pain.
As for today, after a nearly 250 drop in the Dow Jones Industrial Average in early morning trading, stocks recovered some to finish down 139 points at 14,659. The S&P 500 was down 19 points to close at 1573. Gold was down $10 to trade at $1282 per ounce, while oil was up $1.30 to trade at $94.99 per barrel.
We’ll talk more about the adjustment period in our upcoming quarterly update, but because we seem to find ourselves right smack dab in the middle of it right now, we wanted to let you know what our thinking was at this moment. The long term prospects for stocks will be built on a lasting economic recovery, not easy money provided by central bankers. The sooner we can begin building a true foundation, the better.
Have a nice evening everyone.
