Did Powell Just Put a Floor Under Stocks? Wall Street Weighs In

(Bloomberg) -- Stocks charged higher after Federal Reserve Chairman Jerome Powell delivered a double-dose of fuel for equity bulls, on interest rates and valuations. But can it put a lasting end to volatility that has bedeviled investors for two months? Wall Street was divided.

Powell, who warned in October that monetary policy was “a long way from neutral,” said Wednesday at the Economic Club of New York that interest rates are “just below” the neutral range. Also, he sees no major asset class “where valuations appear far in excess of standard benchmarks.”

The S&P 500 rose, putting it on pace for its biggest three-day rally in a month. At 2,723, the gauge has now clawed back almost a third of its roughly 300-point plunge between Sept. 20 and Nov. 23.

Here’s how traders, strategists and economists parsed the events.

Sameer Samana, senior global market strategist for Wells Fargo Investment Institute.

Going from “far away” to “just below” in terms of the Fed’s speech is as close to a 180 as you’ll get. Almost to a T, each one of the risks we’re seeing right now was present when the markets were at 2,950 a couple of months ago, but when the markets dropped as much as 10 percent, people went from shrugging off these concerns to saying, “Oh my God, these issues are going to work out to the negative.” There are a lot of ways that these risks will resolve themselves in a way that is favorable for markets, and today is a great example where the Fed risk seems to have resolved itself.

Art Hogan, chief market strategist at B Riley FBR.

It’s a very important part of the process. The two biggest headwinds is China trade and concerns over a Fed that’s blindly moving forward with hikes and is not influenced by data. Removing one of those headwinds is a very important part of the bottoming process in this market.

Michael Antonelli, institutional equity sales trader and managing director at Robert W. Baird & Co.

When the Fed chair says that we’re closer to neutral that what you think, they’re going to look at the most beaten down names and pile into them. Look at tech, some of these stocks have fallen into valuations that we haven’t seen in years. The markets have to digest the commentary and figure out what the terminal rate is for the Fed. And the markets price in that it’s lower than where we had expected.

Max Gokhman, head of asset allocation for Pacific Life Fund Advisors

Stocks really liked (and bond yields and the dollar really hated) the “just below neutral” comment, as it seemed to be a fairly dovish turn from his comments last month. I would caution against thinking Powell is going to be swayed by either medium-term stock market volatility or by Trump’s criticisms. In fact, Powell’s comments that hikes take at least a year to flow through may have been intended to repudiate the notion of Fed responsibility for recent stock performance.

Michael Purves, Chief Global Strategist at Weeden & Co.

This is very significant because the narrative that Powell was going to hike us into a recession is not nearly as much as a risk as people perceived it to be in early October. I don’t really subscribe to the Powell Put. The market is not down 25 percent. But I would suggest that Powell is reacting to the data. And since the summer nearly every inflation print has missed or at best met. Global growth has slowed, further easing inflationary pressures, and crude has sold off which has softened break evens. He simply does not have to fight a potential inflation break out the way some might have thought.

Jim Vogel, executive vice president at FTN Financial Capital

As Powell said immediately after the “just below” adjective, gradual rate increases are an exercise in balance. Is that code for a thinking about a pause next year? Maybe. More likely, it means exactly what he said today and said frequently before. Policy depends on data, realizing there’s the potential for a lagged impact to hikes already in place.

Stephen Stanley, Amherst Pierpont Securities chief economist:

Chairman Powell took a somewhat more dovish tone today vs. what he has said in the recent past. The markets are overreacting to what he said, perhaps partly because some of the newswire headlines don’t quite accurately convey the nuance of what he said, but that is what markets do, so I can’t say that I was shocked at the initial price action.”

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