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This past week the stock market rose for the fourth week in a row.
The rise was not much, but, it was a rise.
Why is this important?
Well, on March 16, 2022, the Federal Reserve announced that it was raising its policy rate of interest. The policy range was now going to be 25 basis points higher than it had been, raising the range to 25 basis points to 50 basis points.
The effective Federal Funds rate jumped from 0.08 percent to 0.33 percent.
And, the debate over the Fed’s monetary policy moved to how many more increases will there be in 2022…five or six…and…and how large might the addition increases be…25 basis points or 50 basis points.
Then there was also the discussion about how the Fed was going to reduce the size of its securities portfolio.
The stock market rose in the week before the March 16 meeting of the Federal Open Market Committee and continued to rise in the days just following the meeting.
On Friday, March 11, the S&P 500 stock index closed at 4,204.
On Friday, April 1, 2022, the S&P 500 closed at 4,546.
What Is The Market Signalling?
OK, the Federal Reserve is tightening up on monetary policy.
Shouldn’t stock prices be going down…and not up?
What is going on here?
Well, the latest analysis of the stock market coming from the Wall Street Journal, picks up the discussion following a very volatile Friday performance.
“The wobbly trading session (on Friday) came a day after the S&P 500 closed out its biggest quarterly decline since the start of 2020, falling 5 percent for the first three months of the year.”
Here is what the first three months of the year looked like for the S&P 500.
S&P 500 stock index (Federal Reserve)
The low, pictured in this chart is for March 14, two days before the Fed announcement on the rate increase, was made.
My interpretation of this market behavior is that investors are having a hard time really picturing that Mr. Jerome Powell, the Fed Chair, and the FOMC, are really going to tighten up that much.
I have written several articles over the past week or so discussing these concerns and how the concerns are being represented in the data we are now receiving.
Furthermore, investors have just received the new fiscal budget from the Biden administration, and it looks very expansive with major increases coming in the debt of the government.
Attach this to the fact that there is a great deal of uncertainty relating to the Russian invasion of Ukraine and the possible spending that may be attached to that.
In other words, the Federal Reserve may be talking about tightening up on its monetary, but there are questions about whether or not this will happen, especially in the light of higher amounts of government spending coming down the pipeline.
Government Bonds
Another unknown concerning the investment community is the fact that longer-term rates of interest are rising.
Here you see what has happened to the yield on the 10-year U.S. Treasury note.
Yield on 10-year Treasury note (Federal Reserve)
At the end of 2021, the yield on the 10-year was right around 1.50 percent.
Last week, the yield on the 10-year bond was around 2.40 percent.
And, the inflationary expectations built into this yield on Friday were around 2.90 percent, up from 2.50 percent at the end of last year.
Yes, inflationary expectations in the bond market have risen, but the rate of inflation being experienced is over 6.0 percent.
That is, “real” bond yields are in negative territory.
This is not a picture of a restrictive monetary policy.
The point is, even though the Fed is talking about how it is tightening up on monetary policy, investors are still left feeling that the financial markets are not really being constrained at this time and that the “talk” of Federal Reserve “officials” are not really that convincing.
Thus, stock prices continue to rise.
Economic Data
Additional economic data continue to support the stance of the stock market.
“Employers added 431,000 jobs in March, marking 11 straight monthly gains above 400,000, the longest such stretch of growth in records dating back to 1939. The unemployment rate fell to 3.6 percent from 3.8 percent.”
And, “the unemployment rate is quickly approaching the February 2020 pandemic rate of 3.5 percent, which was a 50-year low.”
Furthermore, commodity prices added more fuel to the talk.
Prices that have been fueling inflation, like the prices for oil, grains, and metals, continue to raise expectations that consumer price inflation is not going to taper off anytime soon.
As one analyst added:
“Inflation swamps everything!”
Going Forward
Radical uncertainty still rules the world.
There is just too much we cannot picture about our future.
So, we try and develop a narrative.
The primary narrative right now seems to be that the Fed, hoping not to “overdo” its efforts to tighten up on monetary policy, is trying to “ease” its way into the future.
The Fed is not stepping on the brake…as Chairman Volcker did in the ’80s.
But, the market seems to be saying that the Fed is not even doing enough to really be accused of tightening up on monetary policy.
So, going forward, investors are pushing stock prices higher.
This seems to be the current market narrative.
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