FEB 16, 2018
In some ways, it’s difficult to blame individual investors who don’t understand that the stock market has been artificially supported and propped up by the Fed for coming up on two decades without interruption. Who believe, truly, that when they rant about the glory of “the free market” they’re talking about the US stock market of today.
Not reality. There have been a variety of puts, or downside risk delimiters, in the form of Fed chairpeople and their actions for 20 years running:
As the Dow Jones industrial average fell over 2,600 points between Feb. 2 and Feb. 8, 2018, a decline of over 10% from the all-time high of 26,616 on Jan. 25, and officially a market “correction” as defined by Wall Street, one question kept repeating in investors’ minds: Where is the “Powell Put?”
This investor view is delusional.
All of these puts are predicated on precipitous, disorderly declines. If markets exhibit a slow, steady decline over months and years, the Fed put will not apply. In that world, the Fed’s response function would depend solely on inflation and job creation, the so-called “dual mandate.” Stock investors will be on their own.