Why Are Stocks Rallying? Compare This Year To Last

Speaking in our Big Picture segment on Financial Sense Newshour, Jim Puplava noted that last year’s major pullback is unlikely to play out this time around. The Fed was sounding hawkish at that time, while trade tensions were still simmering. There are several differences between then and now.

In September 2018, the Fed signaled a hawkish turn towards more tightening, stating they were nowhere close to neutral, followed by other statements indicating quantitative tightening (QT) was basically on automatic pilot. The Fed subsequently raised interest rates four times, and we saw the December plunge emerge.

By the beginning of 2019, the Fed had indicated it might reverse course. During the market low, the expectation was for the Fed to raise interest rates three times this year. Instead, we’ve had just the opposite—three interest rate cuts.

The Fed’s January 2019 one-eighty was a pivotal point, Puplava noted. It was followed by the end of the QT program in September, which was previously removing liquidity from the markets.

This culminated with a spike in the overnight lending and repo rates, which went from almost 2 percent to 10 percent. Since then, the Fed has poured $102 billion into the market.

“We're calling this the liquidity rush,” Puplava said. “Basically, the Fed is in the process of undoing every single thing it did last year. That's the big difference.”

From Double Tightening to Double Stimulus

The shift in Fed policy was overdue, Puplava noted, especially in light of the fiscal stimulus in the form of tax cuts and an additional $300 billion of government spending that was acting at counter purposes to Fed tightening.

This created an awkward setup where the Fed and President Trump were at odds. Before raising rates, the Fed has been on record telling Congress that fiscal stimulus was needed.

However, when the Trump tax cuts came into effect in 2018 to stimulate the economy, the Fed was trying to tighten down on the economy.

The economy was not overheating at the time, and inflation pressures were low, and questions about the Fed’s aggressive stance started to mount. Additionally, conditions were such that we essentially experienced what Puplava called a 'double tightening', as the Fed was both raising interest rates and rolling over its balance sheet, which created contracting capital conditions in the stock market and led to the September spike in repo rates.

“The Fed is trying to correct this right now,” Puplava said. “The harsh tightening was out of sync with fiscal policy. And that's the first time, quite honestly, in my almost four decades in the business, that I've seen monetary policy heading in the opposite direction of fiscal policy. They normally work in conjunction and support each other. Thank goodness the Fed made that one hundred and eighty degree turn.”

Political Risks

The uncertainty around the 2020 presidential election could throw a wrench into markets, Puplava noted. The Democratic front runners are still Elizabeth Warren, Bernie Sanders and Joe Biden. And issues exist with each potential candidate.

For example, Elizabeth Warren has threatened to break up big banks, increase antitrust enforcement, disrupt the healthcare system, limit fracking and dismember the technology giants. All of this talk creates market instability, Puplava stated.

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