We seem to have come to the end of one of the most astonishing bull runs in stock-market history, and there's very little indication that Fed chair Jay Powell particularly cares.
The bottom line: Powell will continue to make pro-forma noises about paying attention to financial markets. But he's not going to let Dow vigilantes dictate U.S. monetary policy.
- From their low in March 2009 to their high in September of this year, stocks gained more than 280%. With dividends reinvested, the total return was 365%. That's 17.5% per year, annualized.
- All along the way they were helped along by unprecedentedly accommodative monetary policy, along with maybe just the tiniest dash of irrational exuberance.
Now, interest rates are returning to normal, and stocks have fallen back about 15% from their highs. Valuations remain pretty healthy — the S&P 500 is trading at about 15 times earnings — and in general the stocks that have fallen the most are also the ones which had previously risen the most. Facebook, for instance, might be down 42% from its high in July, but it's still up more than 250% over the past 6 years.
The big picture: Powell is not an economist; he's a capital-markets banker. Weirdly, that makes him less concerned about markets than his predecessors with economics PhDs. Much of financial economics is based on the efficient markets hypothesis, which says that market moves convey important information. That causes central bankers to get worried when markets fall. Bankers, by contrast, are well aware that stock valuations are largely arbitrary, and realize that volatility is normal.
- It's not healthy when stocks go smoothly and steadily upwards in the face of global geopolitical chaos, as they did for the first 18 months or so of the Trump administration.
- Markets expect the economists at the Fed to cut rates (or at least stop raising them) whenever stocks decline by 10% or more. That, too, isn't healthy. The Fed has no mandate to boost the stock market, or to catch it when it falls — especially when the fall is simply a decline from frothy to sensible levels. (I'll have more next week on stock-market valuations.)
Between the lines: Axios' Courtenay Brown asked Powell this week about the way in which the market has reacted to his speeches. Previous Fed chairs took great pains to choose their words carefully, lest the markets read something into them that wasn't there.
- Powell is different: he doesn't care.
- Powell didn't answer Axios' question, which itself spoke volumes. He knows that the current hair-trigger market will jerk up and down on virtually any news, or none. That's not his problem.
- Dion's thought bubble: Powell speaks much more frankly and in simpler terms than Yellen or Bernanke or Greenspan. Unlike Yellen and especially Bernanke, Powell doesn't feel like he needs to go back and clean it up after he's said it and the market took things the wrong way.
Go deeper: Why the Fed was right to hike.