President of the Federal Reserve Jerome Powell plays a good cop after regional Fed leaders have pressed the taper harder. The officials of the Fed said that they are keen to start to boost Powell’s incentive by recognizing economic success and backing quantitative easing withdrawal, while arguing for inflation to decrease and eventual rate increases are a completely distinct call from the taper plans.
Markets are rejoicing, lending credence to the notion that the $120 billion in bond purchases is not a necessary source of nourishment for risk assets, as long as the economy decelerates without stumbling and credit conditions do not tighten.
The S&P 500 makes a modest push above previous record highs, with broad strength that includes economically geared groups but also fully embraces the Nasdaq giants. Treasury yields are following Powell’s lead in decoupling taper intentions from the rate-hike clock, with short-term yields (2-5 year Treasuries) falling more than longer maturities.
What isn’t to like? Except for the fact that the major indices are once again testing the upper rally-path band, there isn’t much to report. Overbought indexes aren’t necessarily a bad thing; they indicate underlying buyer urgency, but they frequently precede a pause. News-driven Friday levitations can have the feel of a culminating “mission accomplished” moment, but I’m not seeing a lot of counterproductive chest-beating by the bulls just yet.
And we’re about to enter September, which isn’t a great month historically, but neither is August, and the S&P is up 2.6 percent with one trading day left. According to Instinet, we are on track for another three-month streak of at least 2% gains, the second of the year but only the 14th since 1990.
The following month was up 8 times and down 5 times, with an overall average gain of 1.7 percent (though the average is inflated by results in 1991, 1997, and 1998, when the market was coming off deep corrections and not sitting at record highs at the start of the streak).
Many of the economic bellwether sectors (banks, homebuilders, energy, and industrials) are still trying to recover from recent highs. So there is still no escape velocity for the reflation/reopening theme.
Market breadth is very strong, with NYSE volume rising by nearly 85 percent.
The VIX plummeted, as expected, in the aftermath of Powell’s “nothing new to fear” speech. Will exit near 16, but not at the lows, which makes sense given the insane single-stock options volumes and the upcoming September.