Markets Waiting For Friday When Powell Speaks At Jackson Hole

Major US equity indices were down last week, but recovered from the lows, as dips were bought at important support. Jerome Powell’s Friday speech at Jackson Hole this week is important in that a possible announcement of tapering of bond purchases can have implications for stocks (DIA, QQQ).

Markets will be on pins and needles until Friday. At 10 a.m. that day, Jerome Powell, Federal Reserve chair, will virtually deliver his speech on “the economic outlook” at the annual Jackson Hole symposium. At issue is if he would announce tapering, and if he did, how stocks would react to it.

Last week’s minutes for the July 27-28 FOMC meeting showed that members were beginning to coalesce around tapering to begin toward the end of this year.

Currently, the Fed spends up to $80 billion in treasury notes and bonds and $40 billion in mortgage-backed securities every month. It is sitting on $8.34 trillion in assets, up from $4.24 trillion in early March last year. The US economy is no longer in crisis, as it was back then. Several metrics, including real GDP, have surpassed the pre-pandemic high. Calls for the removal of the ongoing stimulus are growing.

Should the Fed start to reduce its assets, this could adversely impact equities. Going back 18 years, the S&P 500 and the central bank’s assets show a correlation coefficient of 0.86, which is tight (Chart 1). The relationship got tighter – 0.93 – from March last year, which is when the Fed aggressively began to expand its balance sheet and the large cap index put in a major low. Both have since gone vertical.

Ahead of this, bulls pulled in their horns – a tad. Sentiment measures fell across the board last week.

In the week to Wednesday, American Association of Individual Investors (AAII) bulls dropped 3.8 percentage points week-over-week to 33.2 percent, while bears rose 3.6 percentage points to 35.1 percent. This survey measures retail investor sentiment.

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Disclaimer: This article is not intended to be, nor shall it be construed as investment advice. Neither the information nor any opinion expressed here constitutes an offer to buy or sell any ...

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