It’s the Fed Stupid

Longer-term, profits and profit forecasts are the leading driver of equities. Shorter-term, sentiment can be influenced by various factors.

To varying degrees, the macroeconomic environment, the Fed, global central banks, and geopolitical issues impact market action. Recently, trade has had an outsized influence.

Last month’s selloff was tied to a flare-up in tensions between the U.S. and China. An unexpected tweet by the president threatening Mexico with debilitating tariffs added to the uncertain mood.

Peak-to-trough decline in the S&P 500 Index from April 30 thru June 3: a modest 6.8%. It’s nothing out of the ordinary.

But shortly after Trump threatened Mexico, Fed Chief Powell shifted his stance. No longer was the Fed on hold. Instead, Powell implied the Fed would cut rates if the need arose, sparking a turnaround in stocks that pushed the S&P 500 into new territory.

Since the beginning of the year, a wait-and-see Fed supported equities. During May it cushioned the downside. A newfound flexibility in June has countered sentiment on trade.

The bond market is screaming economic slowdown. But stock market reaction suggests we’re not slipping into a recession. Stay tuned.

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