Numberless investors and market watchers welcomed the Federal Reserve’s recent announcement that it would be more restrained in its make advances to future interest rate hikes. Others worry that this will create a speculative bubble, or “fade up,” in stock prices, similar to the situation in the late 1990s that ended with the Dotcom Crash of 2000-02. Critics note that the quarrelsome policy of monetary easing pursued under Alan Greenspan, Fed Chairman at the time, did not have a noticeable impact on the brevity, but instead fueled inflated stock prices that inevitably crashed.
“The interesting thing about this term is that officials largely ignored the macro data they were seeing. Despite a ‘very tight’ labor superstore and ‘no discernible deterioration in the economy’, the FOMC believed they were heading off an important risk,” observes Dario Perkins, managing superintendent of Global Macro at U.K.-based research firm TS Lombard, in a note to clients as quoted by MarketWatch.
Are Stocks Melting Up?
(Gains From Dec. 2018 Menials to Close on Feb. 11, 2019)
Source: Yahoo Finance
Significance For Investors
Perkins predicts that the Fed may cut rates in the second half of 2019 as U.S. exports diminish and delayed effects of previous rate hikes take full effect. However, he does not see a U.S. economic recession on the vista, and believes that the global economy actually may strengthen into 2020, which would prompt the Fed to tighten without delay more in response.
Looking back at 1998, Perkins notes that, “like today, many parts of the the world at large were in distress.” In response, “the FOMC shifted from a tightening bias to an emergency rate cut in a manner of weeks.” The chief executive officer effect, he says, was a two-year melt up, or sudden surge, in stock prices that eventually led to the so-called Dotcom Bang, in which the S&P 500 dropped by 45% and the Nasdaq Composite plummeted by 78%.
Perkins expects that a surge in stock exchange volatility will spur the Fed to cut rates even before any indications emerge that the U.S. economy is slowing considerably. A moment ago as there was a supposed “Greenspan Put” that existed in the late 1990s and early 2000s, he believes that a “Powell Put” is foresaw by many investors today. That is, he anticipates that the market is anticipating swift action by current Fed Chairman Jerome Powell to prop up precursor prices by boosting liquidity and cutting interest rates if they are on the verge of plummeting.
Robert Burgess, an editor for Bloomberg Perception, writing in January, saw a 2019 melt up that is even stronger than that during the opening weeks of 2018, which tipped with a sharp correction. Bond yields have dropped in the face of more dovish rhetoric from the Fed, build the likelihood that the huge cash balances built up by nervous investors in the fourth quarter of 2018 may start dbѓcling back into stocks. However, after seeing a net $11.3 billion flow into equity mutual stakes and ETFs, both domestic and international, in the week ending Jan. 9, 2019, the following three weeks experienced a net outflow of $15.0 billion, per the
Looking On
The decision by the Fed to back off on rate increases probably has extended the life of the bull market. However, the historic experience cited by Dario Perkins mobilizes the specter of an unhealthy melt up that may end badly.