Its long been assumed by many investors that the central bankers, especially those in the US, watch stock markets volatility like a hawk. There are, for instance, rumors that some economists in the central bank even track the Vix – a measure of volatility – in order to build a set of measures which might help make decisions about interest rates. Thus, we’ve seen the emergence of an idea called the Powell Put, named after the governor of the Fed. The idea here is that the US Federal Reserve won’t let stock markets s fall too much because they’d worry about contagion into the ‘real economy’. Are they right to be worried? On one level cynics would argue that the stock markets aren’t that important and that low-interest rates and QE have made the wealthy even wealthier. The core criticism here is that most shares are owned either directly or indirectly by wealthier investors, who’ve disproportionately benefitted from monetary easing. But stock markets in the US are popular amongst ordinary savers and investors and there is clear evidence of what’s called the wealth effect, in which ordinary investors feel more confident about spending if their stock accounts are doing well. A stable or booming stock market is also good news for corporates who should be encouraged to spend more in capex by booming markets. I think it is fair to say that the debate is fairly balanced, and I suppose one can hardly blame central bankers for being worried about instigating measures that might cause market panic.
But the alleged Powell Put might now have turned into the Trump Put. The US President clearly watches the ups and downs of the US stock markets and that ‘wealth effect’ is clearly on his mind. He, probably rightly, believes that a large part of his re-election bid hangs on the current economic upturn and the S&P 500 reaching ever higher levels. Thus, he’s also keen to keep the stock markets in the US in buoyant mood, lashing out at the US Fed for thinking about increasing rates. There’s now considerable evidence to suggest that the USS Fed might even decrease interest rates – twice – this year.
The net effect of all this is that US investors think that President Trump and Chairman Powell will do everything in their power to keep equity markets in the black. That underpins funds flows and market confidence. Whether that confidence is misplaced depends on your view both of their willingness to keep rewarding investors as well as their ability to keep control of events not under their control (the Iranians, the Chinese, weather, the global economy).
That means for investors its ever more important to keep a watchful eye on key measures: The Vix. The US Fed Balance Sheet. Obviously interest rates. Inflation. And maybe also consumer confidence measures. European equity analysts at investment bank Morgan Stanley certainly think he should be watching the latter numbers. Only a few weeks ago for instance their preferred Consumer Confidence number disappointed – this measure has historically proved a leading indicator for the economy. Morgan Stanley also reports that they’ve seen a sharp drop in the Philly Fed survey and CRB RIND commodity index recently, which are also important indicators to track. Why does this measure matter so much? “Over the last 50 years, US Consumer Confidence has also proved to be a leading indicator for the S&P with our work in the above report highlighting that the average time lag between a peak in consumer confidence” according to the MS analysts “ and a top in equity markets has averaged 8 months over this period. Interestingly we are now 9m past the Oct-18 peak in the Conference Board Consumer Confidence series”.