Market Overview

5 May 2021

Did Mrs Janet Yellen Really Scared the Market?

The U.S. Treasury Secretary Janet Yellen has made some catching remarks on Tuesday, May 4, which ruffled the market’s feathers. The topic was a possible interest rate path of motion in the nearest years, which is a hot-button issue for the stock market. Perpetual quarrelling about just a theoretically conceivable option of possible earlier rate hikes by the Federal Reserve (Fed) has been a sensitive area in the past few weeks of April, until the U.S. regulator's chairman Jerome Powell took off the heat. After the last meeting of the Fed, he confirmed its commitment to an extremely protracted period of a “dovish” stance until the end of 2023 in order to stimulate full-scale economic recovery. That is supposed to include a step-by-step return to pre-virus job figures which may take a long time even at the expense of temporarily higher inflation spikes, while the Fed’s governing council is going to tolerate the inflation abnormality for the extended period.

It would seem like Jerome Powell's comments settled the matter, and the subject is closed at least until the end of the year. But Janet Yellen just reawakened a dormant interest to further fate of the U.S. interest rates. As a result, her words happened to induce some fresh Wall Street’s lows on the high tech Nasdaq 100 index since the beginning of April. High valued stocks like Apple or Amazon recently jumped after the perfect corporate earnings, and their relatively high prices drew intense fire quickly transforming the entire sector into a target for sell-off attacks. Apple Co some days ago stormed the $137 mark, but did not hold so high, and now it tried the water near $127 per share. A similar story happened with Amazon shares, which tested $3,300 per share yesterday just after $3,600 on the pre-market last Friday after the most impressive revenue and profit figures, when also promising plans for the rest of 2021 were announced for hiring new employees and rising the flow of new orders. Facebook, Google and many other shares of smaller technology companies were also damaged.

However, some limited buying activity has already returned to these assets in the last couple of hours before the market's close yesterday. And later, the Nasdaq 100 index itself rebounded from the fresh bottom by more than 1.5% during the futures trading during the European trading session today. Moreover, the broad-based S&P 500 index has fully recovered from the recent damage, as it contains not too high percent of clearly overheated issuers. And the Dow Jones Industrial Average of 30, which exceeded its pre-virus peaks of February 2020 by "only" 15% this year for now, lost no more than 1% in the course of yesterday's humble sale, and already recovered even a little bit above the highs of last week. Thus, if to abstract one's mind from the direct reasons behind the recent turmoil or a shot across the bow, the Dow components as well as consumer staples, utilities or real estate suffered the least, while most banking shares took courage to climb even higher. So, the listed assets may even serve as relatively stable defence in the sea of falling stocks on the assumption that the sell-off has not finished yet.

So, what did Mrs Yellen say that alarmed the markets immediately? She just commented in taped remarks to a virtual event put on by The Atlantic magazine: “It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat, even though the additional spending is relatively small relative to the size of the economy... It could cause some very modest increases in interest rates to get that reallocation, but these are investments our economy needs to be competitive and to be productive (and) I think that our economy will grow faster because of them.” Modest stance and modest talk concerning probably some future modest actions, and that's all for now. It is unlikely that anyone would doubt the very idea that sooner or later the Federal Reserve's interest rates would be "modestly" higher than they are now, when they are almost at zero. But Mrs. Yellen did not mention any dates, unlike the Fed, which was more specific, naming the end of 2023 in its economic projections as an indicative time for a higher Fed's fund rate.

It is worth to remind that the Treasury belongs to the government in the White House, and the Federal Reserve is not. So, they do not directly depend on each other's opinions. If so, even if Janet Yellen had named some dates, they would not have served as an imperative for the Fed. But, fortunately, she did not name any dates, but simply emphasized the relationship between "additional spending" by Joe Biden's circle and a clear necessity to control the money flow at some future moment. That raising rates later may attract more investments from other continents to have another base except the trillions of freshly printed U.S. Dollars plus proposedly higher taxes for the rich or corporates.

As Mrs Yellen also added, the effect of a change in marginal tax rates is “much less powerful in influencing growth in either direction,” adding that her aim is to make sure government deficits “stay small and manageable.” It seems like this better than the rest of her words hints that her department does not expect big problems to appear quickly because of tax reform, which means the conversation about raising rates was something connected to a rather distant prospect in time. All of the above means, most likely, a false-alarm signal logical interpretation for Janet Yellen words yesterday.

For the doubters, or burnt children who dread the fire, it would be very useful to follow all fresh comments of different Fed's representatives this week. Dallas Fed President Robert Kaplan speaks Thursday, while New York Fed President John Williams, Minneapolis Fed President Neel Kashkari, Chicago Fed President Charles Evans, Boston Fed President Eric Rosengren and Cleveland Fed President Loretta Mester are among the numerous Fed policy makers due to speak during the week. All of them are the ones who have a good chance to calm the markets if they want to do so, since they are just the Fed's people who make monetary policy decisions, actually. Here the market community may learn once again of whether it makes any sense to tremble in the face of possible changes in interest rate policy or at least in Fed's asset purchase program, or whether all this was usual verbal bullshit. Or, sorry, "bearshit", of course, in this particular case.

Of course, this does not mean that the seemingly absence of solid fundamental reasons for the big market's "bearish" reversal totally cancels the very possibility of an ordinary or regular technical correction for several overvalued individual stocks or even the entire market segments. It is still quite possible after the S&P 500 index already has gone a long way up to the 4,200 mark while the Dow Jones Industrial Average index reached 34,000 less just six month after Wall Street celebrated its 30,000 round record achievement. But, normal downside corrections and market reversal are two very different subjects to discuss.

 

Disclaimer:

Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.

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