This investor is putting Thursday’s market action under a magnifying glass. Photo by Comstock.
We have to make sure that inflation and inflation expectations remain near our target. And for that reason I think a reasonable response of the Fed in this situation would be to invoke the clause on the taper that said that the taper was data dependent. And we could go on pause on the taper at this juncture and wait until we see how the data shakes out into December.…
--St. Louis Fed President James Bullard, Thursday, October 16, 2014. Bloomberg TV.
Volatility persisted on Thursday, though it may not seem that way given the end result. The S&P 500 Price Index finished the day 0.01449% higher—flat. But during the session, the index fell as much as -1.5%.[i] When markets swing like they have recently, it can be easy to find a host of relatively far-fetched explanations. Thursday, many latched onto the preceding paragraph from an 11-minute interview and leapt to the presumption this—wiggle room on the Fed’s supposed stimulus wind-down—was why stocks rebounded. Some labeled it a “Stunning” shift! But in our view, this is largely a sentiment-driven search for an explanation for recent volatility.
Corrections and short-term gyrations are driven by sentiment more than anything. They can start at any time, for any reason—or no reason—and often end in similarly mystifying forms. This is why they are unpredictable. This is why there is no all-clear. This is why timing them is a fallacy.
Bullard’s comments play to those who (in our view, incorrectly) believe the Fed’s program of bond buying (quantitative easing or QE), presently on course to end this month (if you believe Fed press releases), has been big fuel for stocks’ surge since 2009. Many still suggest this volatility is being driven by the QE “taper”! This view largely discounts the fact stocks became aware the Fed might slow the pace of bond buying from an $85 billion monthly rate in May 2013. Stocks blipped about -5%, then rose the rest of the year. The first taper was announced in December 2013 and implemented in January 2014. The day of the announcement, the S&P 500 rose 1.7%—a myopic fact we point out merely because so many presume anything taperish was received negatively.[ii] In each Fed meeting since, they’ve dialed back QE by $10 billion per month. Since there are eight Fed meetings from last December through this month’s, simple math would show we’ve been on a steady path for an October end since last December. This isn’t sneaking up on anyone. Folks are aware.
Now, Bullard’s comments allude to postponing the final taper of the remaining $15 billion bond buying for one month. That’s less than one tenth of one percent of US GDP. Scaled next to the market capitalization of the broad Russell 3000 Index’s $20.6 trillion market cap (a gauge of 3,030 US stocks), it is even smaller.[iii] The global MSCI World Index’s market cap is $30.7 trillion.[iv] Heck, even the narrower S&P 500 has a market cap of $16.5 trillion, which means assuming Bullard’s statement explains the whole bounceback means $15 billion of bond buying resulted in a $247 billion intraday rebound.[v]
Bullard suggested the move would be designed to keep the program active and the Fed’s options open, though as the Fed has demonstrated in launching QE2, Operation Twist and QE3, that’s nonsensical. All they have to do is vote, issue a press release and tell the New York Fed to buy. Also odd: While he said the Fed must ensure headline inflation remains near target or it risks growth, he also said low oil prices should be a big boost to consumption. But oil prices are the biggest driver of low inflation, so this amounts to worrying over the effect while lauding the cause. (Neither are actually totally accurate, in our view.)
Finally, Bullard isn’t even a voting member of the Fed’s Open Market Committee. They are the ones who set policy. He can only attempt to persuade people he’s right.
Perhaps, just perhaps, the rebound was driven by the statement’s giving folks a vague sense the Fed is watching. But here is another thing it should do: Crush the notion forward guidance is at all predictive. Last month, FOMC minutes stated the program was on course to end this month. Now, it seems volatility has at least one Fed President waffling.
As we’ve said, corrections are sentiment driven. So are day-by-day or minute-by-minute moves, so it is entirely possible sentiment got a boost from this and bounced. As ridiculous as that may seem, it is sometimes the way markets work when folks are jumpy. But we don’t need to extend the teensy amount of bond buying remaining for a month or two months or even one minute longer. The economy would be better off both with less QE bond buying and less fixation on the Fed’s every move.
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[i] Source: FactSet, S&P 500 Price Returns, 10/16/2014. We set our data machine to its most myopic, minute-by-minute tick to calculate this. It was at 10:17 AM (Wall Street Time).
[ii] Source: FactSet, S&P 500 Price Returns, 12/18/2013.
[iii] Source: FactSet, as of 10/16/2014.