In a Nutshell: Market Volatility Could Continue For Quite Some Time

By Ken Herman

"We should expect markets to be a quite rocky and unpredictable.  It could get bumpy while pronouncements from central bankers are likely to be followed by very quick, knee-jerk responses."

The primary takeaway from the latest FOMC meeting is that it expects booming Q2 consumption as well as GDP growth. However, concerning economic growth during the remaining six months of this year, Wall Street expects growth and inflation to moderate.  There is nothing certain about either forecast.

Since no one can say with certainty what economic growth is likely to do even during the next two or three months, how can the Fed possibly know what the entire economy is going to do in the next two or three years? As Chair Powell implied, we’ll have to be patient and watch the data to see whether the FOMC forecast is even close.  For now the Fed is content to make policy on a meeting-by-meeting basis. That means we will have to watch the data, listen to the speeches, and focus on one thing at a time, starting with trying to pinpoint the meeting when the Fed announces monetary tightening, and when interest rate increases will begin.

Many of my Wall Street colleagues believe the market is in a very fragile, emotional state.  We should expect markets to be a quite rocky and unpredictable.  It could get bumpy while pronouncements from central bankers are likely to be followed by very quick, knee-jerk responses.

Recent comments from Fed Chair Jerome Powell continued to reassure markets (after major averages closed higher). Not only did the Fed Chair soothe investors who were worried about price pressures, but he said that fear of inflation alone would not be enough to prompt interest rate increases. But, what about real, significant inflation?

Powell strongly believes all this radical growth is transitory (meaning temporary). “What we’re seeing now, we believe, is inflation in particular categories of goods and services that are being directly affected by this unique historical event that none of us have ever lived through before”, he told the House Select Subcommittee on the Coronavirus Crisis. Inflation is being caused by “extremely strong demand for labor, goods and services,” compounded by a “supply side caught a little bit flat-footed” though it’s “very, very unlikely” the U.S. will see 1970s-style inflation.

One of the tricky things about “trading the Fed” at the moment is that the Fed is less certain about the short-term economic and inflation outlook than it usually is, though it is sure about its short-term policy choices. As a result, traders have to contend not just with trading the taper and eventual increases in interest rates, but also the inflation the Fed might choose to ignore in the interim.

Another problem that has received a lot of media attention are the bottlenecks throughout the globe that have created massive supply shortages. Plagued by the coronavirus pandemic, as well as the Suez Canal blockade and significant west coast port delays, the shipping industry was still trying to get back on its feet before being dealt another blow. One of the biggest ports in the world called Yantian was recently shut down because of a COVID-19 outbreak. That Chinese port happens to export 90% of the world’s electronics. It’s causing massive headaches across the maritime shipping world, as well as complicating recovery efforts throughout the global economy.

While it’s difficult to compare the two latest incidents – one is a port, the other is a chokepoint – the amount of cargo that was affected at Yantian was even larger than the Suez obstruction seen in March. The fallout could stimulate another rise in the price of goods, which have already been significantly impacted by inflation and shortages in recent months. Container shipping companies have needed to conduct massive logistical exercises to re-adjust their routes, but backups impacting America remain significant.

A Wall Street colleague of mine recently said: “This is a precarious time – stocks have gone a relatively long period without any major sell-off, and there is heightened sensitivity to every utterance from the Fed as it attempts to transition to the start of normalization”.