In Friendless Stock Market, Powell Proves No Benefactor of Bulls
(Bloomberg) -- A stock market starved of allies lost a few more Wednesday, with Jerome Powell’s restrained words on volatility sending the S&P 500 tumbling through a chart line that bulls have clung to for 10 months.
It was the worst decline for any Federal Open Market Committee announcement day since 2011 as equities fell on the chairman’s seventh straight meeting. The S&P 500 extended its drop since September to 14.5 percent, barreling through its intraday low on Feb. 9 and leaving it about 160 points from the first bear market in a decade. The Nasdaq 100 turned lower for the year.
“That’s not good. This is, on a technical basis, the kind of lower low that will scare people,” Matt Maley, equity strategist at Miller Tabak & Co., said in an interview. “The ‘Powell put’ is much further out of the money than it was under previous Fed chairs. That’s what hurts psychology.”
Investors craving succor from the Fed chairman got little. Policy makers raised interest rates for the fourth time this year and evinced only moderate inclination to slow the pace of hikes in 2019. The committee was upbeat on the economy -- “activity has been rising at a strong rate,’’ the statement read -- and gave scant evidence stock and bond turmoil is dissuading hawks.
The S&P 500 tumbled through its long-time support when Powell indicated market volatility has done little to change the Fed’s rate path or alter its balance sheet run-off. At 17.1 times earnings, the index settled at its lowest valuation since bottoming after a similar plunge in early 2016.
“It’s purely a technical measurement but psychologically, the market is replete with fear and as fear gathers strength, it’s a much stronger emotion than greed is,” Scott Colyer, chairman and chief executive officer at Advisors Asset Management, said in a phone interview. “And those are the two emotions that make investors either buy or sell. There’s nothing but fear."
While investors were quick to lament Powell’s resolve, it should surprise no one that investors and policy makers have different views of the economy. Virtually every down day in the market has come with economic indicators showing U.S. factories, employment and profits are booming. Powell was asked what signals the market might be picking up on.
"Broadly there’s been a sense of concern among business people and market people about global growth, and that may be partly about trade tensions, it might be about a variety of things,” he said. “If you just mechanically drop into a model of the U.S. economy tariffs, you don’t see very large effects. The large effects would have to come from financial market changes or losses of business confidence, and those are very difficult things to model.”
Angst is becoming a way of life for investors who have watched for three months as more than $4 trillion was lopped from equity values. The Dow Jones Industrial Average has now posted intraday declines exceeding 500 points on three of the last four days and the Nasdaq 100 Index sits 17.2 percent below its August record.
With few signs of inflation or overheating, bulls were hoping Powell would put more emphasis on market swings that have sent measures of equity volatility 2 1/2 times above levels in 2017. Instead, he talked up economic strength and played down the role of stock and bond turbulence in setting policy.
“The FOMC delivered the bare minimum that could be expected, and indicates that they are currently more sensitive to recent economic data than financial market performance,” said Michael Shaoul, chief executive officer at Marketfield Asset Management LLC.
Asked how price swings affect the Fed’s outlook, Powell said: “What matters for the whole economy is material changes in a broad range of financial conditions that are sustained for a period of time. A little bit of volatility -- speaking in the abstract -- some volatility doesn’t probably leave a mark on the economy.”
On the topic of how fast the Fed will reduce its $4 trillion of balance sheet assets, a program that drains liquidity from the financial system, he said: “We thought carefully about how to normalize policy and came to the view that we would effectively have the balance sheet runoff on automatic pilot and use monetary policy, rate policy to adjust to incoming data. I think that has been a good decision. I think that the runoff of the balance sheet has been smooth and has served its purpose and I don’t see us changing that.”
With the 2018 low a memory, how far might stocks drop? Technical analysts had grim scenarios. To get to a 20 percent bear market decline, the S&P 500 would need to fall another 6.5 percent. Earlier this week, Mike Wilson, chief U.S. equity strategist at Morgan Stanley, said the S&P 500 could make a “quick move” to 2,450 while Russ Visch at BMO Capital Markets predicted a drop to 2,445.
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