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What Effect Will Powell Have On Equities Markets?

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What Effect Will Powell Have On Equities Markets?

The Queen of England might have used the words annus horribilis to describe the performance of stock markets in 2018. While that definition is not quite apropos, there has been a marked downturn in the performance of the Dow Jones Industrial Average, the Nasdaq composite index, and the S&P 500 index. The above chart represents the record breaking performance of the Dow heading into 2018. The run-up to 26,500 and its subsequent declines are notable. The Dow defied gravity for years, and gains accelerated well into the first quarter of Trump’s presidency. The one-year performance of the Dow Jones Industrial Average is +15.86 percent, with a reading of 23,932 (Monday, 9 April 2018).

The S&P 500 index gained, which is currently trading around the 2,600 level, experienced similar momentum to gain about 10.57 percent in a year. The technology-heavy Nasdaq is up 17.65 percent over one year and is hovering around the 6,900 level.

While it’s easy to see this recent volatility as a either a drastic turn toward a bear market or, if you’re an optimist, a slight hiccup in a still promising market. However, Olsson Capital trader Smythe Wilson maintained a more descriptive tack on the matter:

One would be remiss to say that the bull market has completely abated. Sure, there has been a slowdown, as evidenced by the sharp decline from 26,000 to around 24,000 with the Dow Jones. However, this short-term correction is reflective of a healthy market that is finding equilibrium. We have seen all sorts of trading activity in the financial markets, particularly with cryptocurrency since December 2017. Now, we are witnessing a correction taking place in equities markets, and we are seeing nervous investors reacting emotionally to these events.

The current level of the Dow Jones is well beneath the 50-day moving average of 24,858.60, but it’s hovering around the 200-day moving average of 23,478.46. This indicates that the recent performance of the Dow (Q1 2018) has been characterized by massive selloffs. If we turn our attention to the one-month performance of the Dow, Bloomberg indicates that it is down 5.54 percent. Indeed, 24,858, or 5.54 percent, is close to the prevailing level of the Dow. By the close of trade on Friday, 6 April 2018, all 30 members in the Dow were down. This introduces the question: Are there any positives that could help to reverse the current trends in the financial markets?

  • Interest Rates – Federal reserve Chair Jerome Powell recently raised the interest rate when the FOMC convened on Wednesday, 21 March 2018. The federal funds rate is now 1.50 – 1.75 percent. This typically has a dampening effect on the financial markets, notably stocks, since the cost of borrowed money increases. This reduces company profits, which ultimately filters down to consumers in the form of higher prices. For these reasons, we can expect a downturn in stock prices. In his first speech as Fed chair, Powell stated that the US labor market was at or very close to maximum employment and that, while there was an inflation uptick, that was a long-run challenges. He did indicate that interest rates may stick at 1.8 percent, but he also urged caution on a number of factors that could change the committee's forecasts.
  • Employment Statistics – Powell also indicated that ‘The absence of a sharp acceleration in wages suggests that the labor market is not excessively tight. I’ll be looking for an additional pickup in wage growth as the labor market strengthens further.’ However, unemployment remained steady at 4.1 percent – another positive for the US economy.
  • Tax Breaks – There is some doubt that the tax breaks enacted this year will filter down to the man on the street in any significant way. Wage growth has been largely static for U.S. workers since the 2008 recession, and that trend has not shown significant signs of reversing. However, if the recent changes to the tax code work as promised, it may mean more personal disposable income available for discretionary spending purposes. This could ultimately bode well for the long-term prosperity of the economy.

Posted-In: marketacrossFederal Reserve Markets General

 

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