Marc Cuniberti Last Friday the market sold off hard with the Dow having dropped close to 1000 points before recovering to close down 610. The rebound late in the day did little to ease the pain for investors, however.
Most of the usual stock favorites got obliterated and no doubt serious damage was done to investor portfolios.
One of the rumored causes was the number of unemployed spiked up past expectations. Adding to the monetary conflagration was the fact that Intel, the iconic microchip company, fell by a whopping 21% on a bad earnings report. It also announced it would lay off about 15% of its workforce. The one-day hammering was the worst day for Intel stock in 5 decades and exasperated the bleak unemployment numbers
What is interesting in this particular rout was how the market reacted to the negative news of the day. Simply put, whereas stock markets long ago used to sell off on bad economic news as it meant declining sales and earnings, in recent decades when bad economic news came out, the markets would rise. This was because the Federal Reserve (the FED) repeatedly was quick on the trigger to halt any significant market downturns by using the many monetary tools at its disposal. These tools include lowering interest rates, funneling cash to the banking system, and easing credit requirements.
Eventually, market participants learned over the years that ill markets brought the FED to the rescue.
That rescue included using their many financial tools to flood the system with money which would thereby goose the markets upwards. Simply put, if the economic campfire was starting to go out, they would pour this monetary gasoline on it to get it going again.
The FED did it so many times in the last few decades, that Wall Street and the FED itself began to believe they were omnipotent and could negate any downturns by simply raining money down on Wall Street.
So often did the FED act on sour market news, Wall Street named the reaction by the FED on the down markets the “FED PUT”. This term basically meant that investors and Wall Street alike would not have to fear an all-out market crash as any severe and persistent downturn would be met with FED actions to stop it.
With this FED PUT in place, over time bad news soon became good news because bad news meant the FED would act to juice the markets upwards.
If unemployment spiked, the FEDS would fire up the printing presses. If a large hedge fund went broke and threatened to bring down the system, the FEDS cobbled together a bailout. An out-of-the-blue event like 9/11 perhaps would find the FEDS coordinating stock purchasing en masse along with Wall Street and the banking industry.
Fast forward to today, and the world economy is coming out of an unprecedented world shutdown from COVID and the massive amount of rescue money printed to stave off a global depression from it. This has resulted in massive and ongoing inflation of that money printing. Since FED money creation is argued to have caused inflation, the FED can no longer print away a market crash due to that same inflation.
Last week when the unemployment news came out, bad as it was, Wall Street perhaps finally realized there would be no FED to the rescue. It simply can’t print any more money to finance any more bailouts as that would cause even more inflation.
And unlike so many times before, this time around the economy’s worsening condition moved the markets downward. A radical change from a market that rose or fell depending on what the FED would do.
This was a meaningful departure from what had been for decades where any economic weakness would be perceived to be followed by the FED’s printing press. Perhaps the markets will now have to start to reflect the health of the economy instead of being a market-driven solely by the repeated steroid injections of easy money by the FED.
“Watching the markets so you don’t have to”
This article expresses the opinion of Marc Cuniberti and is not meant as investment advice, or a recommendation to buy or sell any securities, nor represents the opinion of any bank, investment firm or RIA, nor this media outlet, its staff, members or underwriters. Mr. Cuniberti holds a B.A. in Economics with honors, 1979, and California Insurance License #0L34249 His insurance agency is BAP INC. insurance services. Email: [email protected]
