WASHINGTON – Wednesday trading action has pivoted all day on the actual or speculated news due to come from the Federal Reserve at 2 p.m. And now that the news is coming out, courtesy of a presentation by Fed Chair Jerome Powell, stocks have decisively decided to continue wavering. Powell had good news on sustaining near zero interest rates – except for how that might affect US banks. But they also had some positive, if time-delayed news on the US GDP as well.
Back to Wall Street for a moment, stocks and major averages resumed Tuesday’s weird trading pattern Wednesday. The seemingly evergreen, tech-heavy NASDAQ continued to advance, while, at least as of 3 p.m. ET, the broader-based S&P 500 and the big-stock Dow Industrials remained comfortably in the red ink zone. While recovering to loss figure of 80 points and change at about 2:45, the Dow is back to tanking speed, down over 200 points again as we write this article.
Don’t fight the Fed…
Various stock groups have been reacting to today’s Fed news. Prior to Powell’s presentation, Tuesday’s downward pressure continued, with speculators betting on the outcome that more or less transpired. The Fed will keep interest rates close to zero for at least two more years as one way of encouraging business to kick back into gear once again. And stay there.
Logically, taking this and other rather bold, stimulative measures the Fed continues to take, the Fed expects this to juice the nation’s gross national product, or GDP for short. That would lead to uncommonly robust growth beginning in the 2020 calendar year’s second half. And, for the most part, a spike in employment activity, mainly due to greater and greater numbers of furloughed or laid off workers heading back to the jobs the coronavirus panic forced them to leave.
CNBC reports additional details.
“The Federal Open Market Committee met this week as states begin to reopen and after unemployment saw its worst monthly drop in history followed by its biggest gain. In addition, the meeting comes the same week the National Bureau of Economic Research declared that a recession started in February, ending the longest expansion in U.S. history.”
True, as it stands. But some analysts claim the recession is already over, having concluded at the end of May, as confirmed by the 2.5 million job increase that happened that month. We should eventually see massive increases in the GDP later this year.
…but back to Chairman Powell.
“Along with the [near zero interest rate] decision, central bankers projected Wednesday that the economy will shrink 6.5% in 2020, a year that saw an unprecedented halting of business activity in an effort to combat the coronavirus pandemic. However, 2021 is expected to show a 5% gain followed by 3.5% in 2022, both well above the economy’s longer-term trend.
“The central bank repeated its commitment from the April meeting that it ‘expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.’
“The Fed also said it will continue to increase its bond holdings, targeting Treasury purchases at $80 billion a month and mortgage-backed securities at $40 billion.
“… Powell said the [Fed’s] economic projections were made with the ‘general expectation of an economic recovery beginning in the second half of this year and lasting over the next couple of years, supported by interest rates that remain at their current level near zero.’”
A robust GDP plus near zero interest rates: Great for you and me but maybe not for big banks
It seems that’s good news for nearly everyone and everything except the banks. But with interest rates remaining lower for longer, that doesn’t leave much room for lenders to make money on loans. And this could cripple bottom lines for at least a year or more should the Fed’s scenario hold true. Most big banks are off today, which doesn’t help the Dow or the S&P averages.
On the other hand, larger banks, at least, do have additional ways of making money and may start to emphasize those in coming months in order to help their own bottom lines. We’ll just have to see how this game unfolds for the rest of 2020. As was true of what we call the 2007-2010 Great Recession, we’ve never seen this particular kind of pandemic hit before, so it’s new territory for everyone. A fast-improving GDP, already forecast, should help.
Robinhood’s Merry Millennials going irrationally exuberant?
In other non-interest rate, non-GDP news, the Twin Tylers of ZeroHedge report:
Dow Dives, Nasdaq roars as Robinhood & TD Ameritrade Go Down… Again…
I experienced roughly half-an-hour of downtime Tuesday morning with Schwab, before things got back to normal. Couldn’t log on, which is frustrating to say the least in times like these. The apparently ongoing TD Ameritrade problems could also become Schwab’s. TD Ameritrade is scheduled at some point, likely this year, to be bought out by the San Francisco-based brokerage firm.
Ditto the Robinhood outage issue has cropped up several times recently, and on big trading days, too. That upstart site was, I believe, the first to offer commission-free trading to its customers. It has become the playground of millennials lately. But now a few lawsuits have come across their legal department’s transom due. Reason: the trading platform’s habit of experiencing downtime at the wrong time.
Nurtured on a steady diet of video games, commission-free investing at Robinhood, which has vigorously recruited this demographic, is apparently a new kind of fund for them.
I hear whispers that Robinhood customers have been jacking up various obscure stocks to astronomical levels. How? Probably by buzzing about them online and, perhaps, accidentally creating virtual Ponzi schemes on the fly. Are Chinese trolls involved in the fun as well? Ah, but it’s all speculation at this point, and I’ll need to research this further. On the other hand, some of this stuff sure is weird. And, like those high-speed trading machines I’ve come to despise, these trading antics, occurring en masse, could upset the investing apple cart yet again.
Wrapping it up
More as we get hold of things. But right now, Mr Market seems to be staging a correction of the current irrational exuberance on Wall Street. Which is irritating for a bull like this writer. But probably necessary, too. If markets go up too far too fast, that makes the inevitable correction worse and worse. We’d rather take a bit of medicine now then have our portfolios come down with a fatal stroke later. But let’s encourage two more years of that near zero interest rate environment. That way, we can all refinance our loans before the next mess.
– Headline image: Cartoon by Branco. Reproduced with permission and by arrangement with LegalInsurrection.