CWS Market Review – November 23, 2021

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Biden Reappoints Powell

Yesterday, President Biden appointed Jay Powell to another four-year term as Chairman of the Federal Reserve Board. The stock market liked the news, at least at first. Early on Monday, the S&P 500 rallied nearly 1% and it reached an all-time intra-day high. Alas, it was not to last. The market gave back those gains and closed lower. The market gods giveth and the market gods taketh away.

What does the Powell nomination mean for us as investors? It’s definitely a positive, and that was reflected in yesterday’s early rally. Powell has shown himself to be attentive to the mood of Wall Street without being overly deferential. Once Covid broke out, he moved quickly on interest rates. You can’t argue with the market’s performance since the low from last March.

Several weeks ago, the Powell nomination seemed to be a no-brainer. Powell is as institutional-Washington as you can get. Recently, there were growing noises of dissent, especially from liberal Democrats like Senator Elizabeth Warren who favored Fed Governor Lael Brainard. Interestingly, there haven’t been quite the noises of discontent considering the explosion in the Fed’s balance sheet along with the worst inflation in 30 years.

Senator Warren criticized Powell as being weak on bank regulation and for what she perceived to be his distance to a climate change agenda. Perhaps sensing the challenge, President Biden nominated Brainard as the Fed’s Vice-Chair.

From the WSJ:

The president’s decision reflected a desire by Mr. Biden to maintain stability at the central bank amid public concerns about high prices for everything from groceries to fuel, administration officials said. Mr. Biden’s advisers said they want to focus much of their attention on passage of their social spending and climate legislation and believe Mr. Powell will more easily win Senate confirmation, despite objections from progressives.

“Put directly: at this moment both of enormous potential and enormous uncertainty for our economy, we need stability and independence at the Federal Reserve. Jay has proven the independence that I value in a Fed chair,” Mr. Biden said at the White House on Monday.

I suspect that Treasury Secretary Janet Yellen, a former Fed chair herself, pushed for Powell. I think it’s interesting that previous Fed chairs have been professional economists. Powell, instead, is a lawyer and as such, he tends to be much more direct than his predecessors. Previous Congressional appearances often sounded like a professor teaching a remedial econ class. (Actually, it kind of was.)

Alan Greenspan famously told Congress, “I guess I should warn you, if I turn out to be particularly clear, you’ve probably misunderstood what I’ve said.” That’s not an issue with Powell.

For Biden, Powell Is a Safe Choice

There’s a little confusion as to how the Fed is run. Powell actually gets two nominations. One is as a member of the Federal Reserve Board. Another is as chairman of that board. The nomination to the Fed Board is a 14-year term. There are seven spots, so it means the president can add a new member every other year.

In reality, few members of the Fed board serve that long, but Fed chairs tend to stick around. In the last 70 years, there have 14 presidents but only eight Fed chairmen.

Powell was nominated by President Obama to the Federal Reserve Board in 2012 for a term that ended in 2014. He was re-nominated by Obama to that position which lasts all the way to 2028, assuming he wants to hang around that long.

Four years ago, President Trump nominated Powell to be Fed Chair. He was confirmed by the Senate 83-14. Interestingly, one of the dissenting votes came from then-Senator Kamala Harris. I doubt Powell will run into much difficulty in getting approval from the Senate, and that’s probably a reason why Biden went with him. I expect some senators will oppose Powell and cite the Fed’s record on inflation. They certainly have a point. Still, Powell has worked to make the Fed more transparent.

The Federal Reserve Board is different from the rate-setting committee which is the Federal Open Market Committee. My apologies, but this is where things get wonky. The FOMC is a 12-member committee which includes the seven members of the Federal Reserve Board, plus five of the 12 regional bank presidents. One exception is that the president of the New York Fed is always a member. The other seats rotate among the 11 other regional banks.

This may sound surprising to modern ears but the prominence of the Federal Reserve has increased dramatically over the past 40 years. Not that long ago, the Fed wasn’t that big a deal. It wasn’t in the news that much. In fact, the Fed didn’t even announce changes to interest rates. Fed watchers had to figure it out. That’s all changed for the better.

Technically, it’s possible for the Fed chair to be overruled on an interest-rate decision. It’s happened before, but it would a major story if it happened today. Now the Fed aims for consensus and most of the policy statements are bland and uninteresting. It’s not the Fed’s fault. That’s how the market likes it.

There’s been a big change in the market’s outlook for interest rates. Here’s an interesting chart from the futures market.

Two months ago, traders thought there was less than a 10% chance that the Fed would hike interest rates by June. Now they think there’s a 75%, which is probably about 24.5% too low.

Why the big change? The answer is Jay Powell. This is a good example of the Fed being transparent about its intentions. Powell can be criticized on many levels but he’s not to blame for there being a lack of political will to fight inflation.

The President today released 50 million barrels of oil from the Strategic Petroleum Reserve. While the intentions are good, the effect is probably minimal. Fifty million barrels may sound like a lot, but the U.S. economy will go through that quickly. Some other countries are doing the same to their reserves.

Ultimately, inflation is a political problem not unlike parking in a big city. It’s allowed to grow unchecked until enough people start to complain about it. We’re not there just yet. I’ll give you an example. The inflation-adjusted yield on the 10-year Treasury is now around -1%. That’s crazy low and it shows you why the stock market has been such an obvious alternative for investors.

Not only have valuations improved, but so, too, have the fundamentals for the stock market. At the beginning of this year, Wall Street had been expecting the S&P 500 to report Q4 earnings of $44.27 per share. That’s the index-adjusted number. Now expectations are up to $50.52 per share.

The stock market has been remarkably calm recently. Today was the 28th day in a row in which the S&P 500 closed up or down by less than 1%. Twenty-one of those days were moves of less than 0.5%.

Typically, volatility reflects what the stock market just did rather than being a forecast of what it will do. A rising market tends to be a calm one. A plunging market is a chaotic one. Most of the big swings in stock market history have come when the indexes were well off their highs. The S&P 500 reached an all-time closing high on Thursday and an intra-day high yesterday.

The stock market will be closed on Thursday for Thanksgiving. Due to the holiday, we’re going to get a crush of economic reports tomorrow. The jobless-claims report, which usually comes out each Thursday, will come out on Wednesday. The last report showed another post-Covid low.

The government will also update its Q3 GDP report. The initial report last month indicated growth of just 2%. That’s not that good. It will be interesting to see if it gets revised higher.

Usually, the day after the GDP report comes out, we get the reports on personal income and spending (see below). This time, they will come out the same day. So far, consumer spending has held up well despite growing dissatisfaction with the economy. If that’s not enough, we’ll also get reports on new-home sales and consumer confidence, and also the minutes to the last Fed meeting are due out.

The stock market will be open on Friday, but it will close at 1 p.m. ET. This is usually the slowest trading day of the year.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

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Posted by on November 23rd, 2021 at 7:10 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.