Tuesday, March 17, 2015

NASDAQ to tread water while Fed meets

The potential for just a few words to jolt the market tomorrow afternoon will cause many market participants to stand still and hold their breath. It's a slam dunk for the Fed FOMC to remove the patient language from its statement at 2:15 PM on Wednesday, but until the deed is done and the exact language is dissected, all bets will be on hold. And when the statement comes out, the market will bounce around in all directions, not because of confusion about the statement, but simply because that's what happens when traders hold back and then suddenly let loose their frustration with trying to do nothing. Traders are never paid to do nothing. It's not in their DNA. We can still expect a lot of volatility and maybe even a big move up or down - and even a number of big moves up and down, even today - since that's not uncommon with volatility.

The market could end the day roughly flat, or up or down a little, or have a big jump or sell-off, all with equal probability. Volatility will be king, and with volatility in control anything can happen, even big moves (like yesterday), but none of this is fundamentally significant.. None of this will have anything to do with long-term economic or business fundamentals. Mostly noise, and lots of it.

Fed funds futures prices are still indicating that Fed rate liftoff will most likely occur in September. Sure, various Fed officials have indicated that they want the flexibility to be able to move in June, but there has not been a strong chorus of Fed officials arguing for a hike in June itself. Flexibility and action are not the same thing. The main point about removing the patient language is that it begins to return the Fed to its normal mode of operation, namely data-driven. The problem is that it is the interpretation of the data that can be problematic and very subjective and leads to confusion between the market and the Fed. Even with the formal patient language removed, the Fed will always be a lot more patient than the ADHD-afflicted traders on Wall Street. So, the mindless chatter about hiking in June is just that - mindless.

The best way to keep the Fed in perspective is to focus on the overall U.S. economy. The Fed only jumps into action when things get too hot or too cold. With a relatively happy medium they tend to sit still. The recovery from the financial crisis still has a ways to go. GDP is still not consistently booming. Employment is gaining, at a healthy clip, but the labor participation rate and under-employment are still problematic. Wage growth is far too tepid. Inflation gets whipped around by energy and food prices, but has tended to be weaker rather than stronger. All in all, we're getting there, but only at a pace that suggests moderation rather than abrupt change. Fed funds futures point to a rate of only 0.75% even a year from now. That rate will not be tough for the stock market to swallow.

NASDAQ futures are down modestly, indicating a modest pullback at the open. A little profit-taking and consolidation is not uncommon after a big rise such as on Monday. As always, futures and the opening move are not reliable indicators of the market trend for the rest of the day.

The Fed press conference after the announcement will be almost as consequential as the announcement itself. People do tend to over-parse even the tiniest nuances in language, which will only add to volatility.

It will probably take at least three days or even a full week for the market to settle down from the moment the FOMC announcement hits the screens on Wednesday. In truth, there is like zero fundamental significance to all of the volatility that will transpire, but Wall Street is usually more about trading volatility than the underlying long-term trend.

-- Jack Krupansky


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