Why the July FOMC Minutes Are So Damaging to Bulls

Federal Reserve Chairman Jerome Powell

Jobless claims are up, and stocks are down. That’s the story this morning as bulls cheer on the major indexes near their all-time highs.

Spoiling things was the Labor Department, which reported that U.S. weekly jobless claims totaled 1.106 million last week, surpassing the economist estimate of 923,000.

The market’s losses in response to the news have been small, however, indicating that today’s turbulence might not be overly serious. The Dow (-0.30%) and S&P (-0.20%) dropped moderately while the Nasdaq Composite (+0.20%) inched higher.

Still, though, it’s not what bulls wanted to see at the top of an extended rally. Especially with unemployment relief talks on hold in Washington.

“We can’t even be sure this recovery is sustainable as the economy got a huge boost from consumers’ wallets lined with $500 billion of stimulus from Washington from those $1,200 and $600 checks,” Chris Rupkey, chief financial economist at MUFG, said.

“That money is gone and with it the prospects for a lasting economic recovery where everyone on Main Street benefits. At the moment only stock market investors are riding high as the Federal Reserve’s money printing benefits Wall Street more than Main Street.”

Rupkey continued, adding:

“Net, net, new jobless filings are rising again which means the economy isn’t out of the woods yet with many businesses across the country still in full or partial shut down and unable to pay all their employees or make the mortgage rent and keep the lights on. The stock market rally on confidence the worst of the recession is behind us may be premature.”

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It’s a narrative that’s persisted since stocks crashed in late March:

So long as the Fed continues to provide fiscal stimulus, the market will rise.

And it’s proven to be mostly true, save for a few volatility “hiccups” along the way. Yesterday, though, the Fed quickly became a bearish force when the Federal Open Market Committee (FOMC) released minutes from its July 28-29 meeting.

In the minutes, investors learned that Fed officials remain concerned about the lasting impacts of Covid-19 on the U.S. economy. Moreover, they discovered that the yield curve could spiral out of control, and worse, a bond-buying program might not prevent it from occurring.

“The ongoing public health crisis would weigh heavily on economic activity, employment, and inflation in the near term,” read the minutes.

In light of the comments, market sentiment started to shift. Equities dropped quickly yesterday afternoon as a result.

But really, investors shouldn’t have been surprised by the minutes. It’s no secret that Covid-19 has scorched the U.S. economy.

What may have happened was a “come to Jesus” moment for bulls. They’ve been ignoring the economic damage for months, now.

When Fed officials confirmed that the U.S. economy would indeed face additional coronavirus-related struggles, some bulls couldn’t keep their heads buried in the sand any longer.

That doesn’t mean all of them went that direction, however. Today’s relatively flat trading session may be proof enough that investors have already shaken off the bad news.

But with no coronavirus relief bill or additional stimulus package yet confirmed, there are likely more disappointments coming down the pipe.

Regardless of whether the market rebounds off its record highs or not.

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