Should I Stay or Should I Go?

(Today’s Theme Song: The Clash, obviously)

In yesterday’s piece, highlighting the convergence of an FOMC meeting and earnings from “The Four Horsemen of the Mag7”, we noted that while the news was likely to be consequential and had the potential to cause a big market swing, there was a very reasonable chance that there would be a relative yawn from an index viewpoint.  That proves to be the case this morning, though month-end dynamics are providing an upward bias.

As we wrote yesterday:

In theory, [the news flow] can lead to a volatile afternoon.  The reality might differ.

In theory, if just under 20% of the index’s market capitalization moves substantially in one direction or another, that can lead to a highly outsized index move.  In practice, we often see moves of this nature roughly balance each other out. 

To recap what we learned yesterday, Jerome Powell is staying on the Federal Reserve Board, investors like what they heard from Alphabet (GOOGL, GOOG), are less enthused with Amazon (AMZN) and Microsoft (MSFT), and dislike Meta Platforms’ (META) spending plans.  Of those four hyperscalers, all of whom are spending billions to build out their AI capabilities, the perception is that Alphabet is doing the best job of turning that spending into bottom-line efficiency.  Meanwhile, there is skepticism that META, which incinerated billions of dollars on its ill-fated foray into the metaverse, might be utilizing its funds less effectively.

Around 11:30 ET, we have GOOGL +7.2%, AMZN -2.2%, MSFT -5.3%, and META -9.4%, respectively.  On balance, given their index weights, this is a drag on the S&P 500 (SPX) and Nasdaq 100 (NDX) indices, but not enough to outweigh the broad advance stemming from the positivity emanating from lower oil prices and yields.  Never mind that stocks have largely ignored the rising yields and oil prices so far this month.  We noted equities’ “asymmetrical response” to news earlier this week.  Good news has been rewarded; not-so-good news has been largely ignored.  Why should that pattern end now?

The FOMC meeting had little immediate effect on stock and bond prices, but there was no shortage of drama that emerged.  For starters, the Statement acknowledged that there were four dissents at yesterday’s meeting.  This was the most since October 1992.  One dissent, from Stephen Miran, favored a ¼ point cut, as usual; the other three, from Beth Hammack, Neel Kashkari, and Lorie Logan, supported keeping rates steady but did not support the inclusion of an easing bias in the statement.  This could certainly be interpreted as genuine concern that price pressures emanating from rising energy prices could impede the Fed’s ability to cut rates in the foreseeable future.  It could, no doubt, also be interpreted as a bit of a warning to incoming Chair Warsh that he is likely to face a difficult task if he intends to implement the President’s desire for lower rates if the rest of the Committee disagrees about their necessity.  Both could be true, of course.  We’ll know whether this is the case in the meetings going forward.

We also learned that Powell considered yesterday’s meeting to be his last in the role of Chair.  Kevin Warsh was confirmed by the Senate Banking Committee a few hours before the meeting, and his approval by the full Senate is all but assured.  That wasn’t the drama, though.  Instead, there was an open question about whether the current Chair would remain in his term as Governor until it ends in 2028.  Powell spared us too much drama by addressing it in his opening statement, saying:

I welcomed the announcement last Friday by the U.S. Attorney for the District of Columbia that she had closed the criminal investigation. She also noted, however, that she would not hesitate to restart the investigation.

I have said that I will not leave the Board until this investigation is well and truly over, with transparency and finality, and I stand by that.

After my term as Chair ends on May 15, I will continue to serve as a governor for a period of time, to be determined. I plan to keep a low profile as a governor. There is only ever one Chair of the Federal Reserve Board. When Kevin Warsh is confirmed and sworn, he will be that Chair. Once sworn in as Board Chair, his new colleagues will elect him to chair the FOMC as well.

This will make Powell the first former Chair to remain on the Federal Reserve Board since 1948.  But I don’t blame him one bit.  As we wrote last week:

And if I were advising the Chair (he’s a lawyer and does not need my amateur opinion), I would tell him not to abandon his post on the Board of Governors anytime soon.

I know he didn’t take my advice, but I’m glad he agreed.  We won’t be hearing much from Powell in the coming months as Warsh takes the lead, but practical matters are keeping him in the fold.  I doubt that was what was intended, especially since Powell staying means that Miran is likely to leave when Warsh arrives, thus removing a reliable vote for rate cuts, but this is the reality.  He’s staying, not going.