Stocks opened for a gain this morning in anticipation of Fed Chairman Jerome Powell’s Congressional testimony. In a prepared statement (released prior to Powell’s appearance before lawmakers), he pushed back hard against taper fears, explaining that the US economic recovery hasn’t progressed enough to reduce bond purchases.
“At our June meeting, the Committee discussed the economy’s progress toward our goals since we adopted our asset purchase guidance last December. While reaching the standard of ‘substantial further progress’ is still a ways off, participants expect that progress will continue,” Powell said.
In addition, Powell argued that household and business balance sheets are looking quite strong. Core financial institutions have shown their resilience, too. He believes the labor market will continue to recover and household spending patterns should trend higher.
Powell even touched on the housing market, adding that demand is strong while failing to mention any sort of bubble. Or the fact that home prices have gotten so out of control over the last few months. He also mentioned that business investment remains solid.
Sounds like things are going pretty well then, right? Not to Powell & Co., who insist that scaling back on quantitative easing (QE) at this point would be irresponsible. Many analysts expected a tapering announcement following the August FOMC meeting.
Now, not so much.
“The markets have gotten very accustomed to ’low rates for longer,″ explained Diane Swonk, chief economist at Grant Thornton.
“The reality is the Fed has to deal with whatever comes in.”
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The dollar and Treasury yields both fell in response to Powell’s statement. Bulls, meanwhile, were more than ready to buy equities initially.
Then, something curious happened right around the same time Powell began to speak:
Stocks quickly flattened. The S&P 500 was actually down on the day for a few moments.
It all had to do with new details from the Democrats’ tax plan, which emerged right when Powell addressed Congress. Now, Democrat lawmakers want to raise taxes by roughly $3.5 trillion over the next 10 years. It’s unlikely that we’ll see a tax hike of that magnitude, though, by the time the bill eventually comes across the President’s desk.
“We know we have a long road to go,” said Senate Majority Leader Chuck Schumer.
“I make no illusions how challenging this is going to be,” Sen. Mark Warner, vice-chair of the caucus, remarked.
Goldman analysts predict a whittled-down $1.5 trillion tax increase to pass after lengthy negotiations.
Factoring in a reduced amount was apparently still enough to spark some midday selling. So, as has been the case for weeks, the market continues to touch new highs while seeming ripe for a sudden plunge.
Powell virtually guaranteed that QE would persist today. And yet stocks didn’t explode higher as one would expect. With equities massively overstretched, bulls seem to be doing a little soul searching.
But will that manifest as a correction? Probably not without a major trigger. As long as the Fed gives investors the “green light” to buy, equities could very well creep higher from here.
Until, of course, another negative headline hits, causing stocks to scorch lower toward a vicious (but probably temporary) dip.