Fridays are strange days on Wall Street. That’s because, unless they’re super-confident, short-term traders don’t like to hold a large inventory of securities over a weekend. Too much time for bad stuff to happen. So they sell enthusiastically on Friday afternoons.
There’s certain sense to this behavior. For them two days+ may be a long holding period. Also, companies and people, particularly sneaky ones, like to save bad news up for late Friday afternoon or the weekend, when they think no one is paying attention. This lessens the pain, they think. Often, it has the opposite effect, however, since anyone who’s been around for a while knows what a late-Friday press release invariably contains.
So in one sense it’s not a great surprise that the huge effort–enough to send her staggering off the stage–Janet Yellen put out yesterday to explain that, yes, the US economy is in great shape and, yes, the Fed is going to take the first baby steps to get the country out of interest rate intensive care (IRIC (?)–although it may be too late for this acronym) before New Year’s eve had no lasting positive effect on stock prices today.
The reason is that, aside from robots designed to react to newsfeeds, everyone knew that already. In fact, her announcement on Thursday the 15th that the Fed Funds rate would stay at zero for now wasn’t a shock, either. Futures markets had been putting the odds of a rate hike in September at less than one in three.
Yet the stock market took something Ms. Yellen said last week the wrong way. If it wasn’t the interest rate announcement, what was it?
Actually, I think there are two things, one said and one not.
The first, and more important, in my view, is the unspoken but strongly held belief by the nation’s finest economists that if we have to depend on the White House and Congress for economic support, we’re doomed. That’s because monetary possibilities to plug up a hole in the bottom of the boat are all used up. The federal arsenal now contains only fiscal policy—changes in government regulation of business, or in spending priorities or in taxes. The Fed knows it isn’t going to get bailed out by Washington if it raises rates too soon–something that has gotten many nations into trouble in the past. Therefore, it has to err on the side of caution, even if that’s unhealthy to do.
We all sot of know this, but it’s not a plus to be reminded that as a nation we’re stuck in at best second gear as long as Washington dysfunctions its way through life.
The second, the one said, is that developments in China have the potential to hurt US growth enough to tip us over the edge. I don’t think the effect on the stock market is so much about the details. It’s the headline that matters–that the US is no longer so large that we’re impervious to what may happen in any other single country. It conjures up thoughts of the post-WWI, when the UK passed the mantle of world economic leadership to the US, except that we’re now in the role of the UK.
Again, everyone sort of knew this was happening. But having it confirmed by our foremost economists is another thing.
To put this in stock market terms, I don’t think Ms. Yellen is calling into question the market’s ideas about current earnings as about the multiple those earnings are worth.