In October of 1987, the S&P 500 fell more than 20% in one day.You can imagine the panic that followed. In an attempt to calm the market, Fed Chairman Alan Greenspan issued a statement: “The Federal Reserve, consistent with its responsibilities as the nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.” No one knew what it meant. Later reports indicated that not even Greenspan knew what the Fed would do. But it stopped the panic. To prove his sincerity, Greenspan cut interest rates a couple of weeks after the crash — and set into motion a tradition that would continue through every bear market. If Powell follows suit today, he has the power to turn this decline around…
The Fed’s Bear-Proof Put
Jerome Powell has been a member of the Federal Reserve since 2012. He’s chaired the Board since 2018.As an experienced member of the Fed, he must understand the Fed put. It’s been the Fed’s go-to tool to protect against market declines since 1987. After that first rate cut, Greenspan cut rates again in the 1990 bear market. He did the same in 1998 during the Asian financial crisis, barely avoiding a bear market. In 2001, he cut rates dramatically, including the day markets reopened after the 9/11 terrorist attacks. His successor Ben Barnanke took notes. As the global financial crisis began in 2008, Bernanke cut rates. When that wasn’t enough, the Fed began quantitative easing programs. They basically dropped money from helicopters on Wall Street until the market turned up. These quantitative easing programs weren’t meant to last forever, though, and in 2013 Bernanke announced a tapering plan. There were no specifics. Bernanke simply said the Fed would start tapering QE at some time in the future. This vague announcement spooked traders. Interest rates rose quickly as traders sold bonds. The S&P 500 dropped 7.5% in the next month.
Other members of the Fed attempted to ease concerns as the sell-off accelerated. But the damage was done.As Powell said, “The taper tantrum left scars on anybody who was working at the Fed at that time.” The Fed would never make this mistake again…
Will Powell Learn From the Past?
These days, the Fed publishes detailed plans for tapering. This shows us they can learn from the past.And that’s why I expect them to take actions that will boost stock prices soon. After all, the Fed put saved traders from a prolonged bear market in 1987, 1990, and 1998. Jerome Powell and team are well aware of how effective it’s been over the years. The Fed’s next meeting starts June 14. When Powell steps up to the podium the next day, traders will expect big things. I think he’ll deliver with the next Fed put. High inflation will help the Fed craft its put. I expect to hear hints that a 0.25% hike is possible at a future meeting. This will show traders the Fed is still committed to slaying inflation, but also committed to ending the bear market. That’s more than three weeks away. Maybe the Fed will surprise us with something before the next meeting. I doubt it, though. But if the selling continues until then, I will be watching money supply data for signs the Fed is working on their put behind the scenes. If executed well, it could turn the upcoming bear market rally into a sustainable bull market.
Regards,Amber Hestla Senior Analyst, True Options Masters
Chart of the Day:Time for a Legendary Tech Bounce?
By Mike Merson, Managing Editor, True Options Masters
We’re either setting up for one ridiculous tech bounce… or the breakdown of the decade.Today’s chart compares the Nasdaq 100 index to the S&P 500 index. Since the dot-com blowup, this ratio climbed from a low of almost exactly 1 in 2002 to 3.6 in 2022. It’s little surprise… The biggest gains of those 10 years — the multi-dozen-thousand percent stories — were in tech stocks like Amazon and Google. Now, though, we’re at a crossroads. The ratio has come down to test a VERY long-term rising support line. Barring a brief dip below in 2008 that got engulfed by a green monthly candle, the ratio has dutifully respected this support for 8 years. If we break below… The decline in tech stocks so far could look like just a warmup. But if we bounce off this line with confidence, this uptrend will likely resume — which means a massive recovery in tech. Watch this ratio closely for a bounce or a breakdown. There’re high odds that what happens next will define the next several years of investing.
Regards,Mike Merson Managing Editor, True Options Masters