Down 2.4% on Friday. Up 1.5% on Monday. Such is life in the stock market these days when the computers think they’ve found a theme. Or rather, when the computers think they’ve found a theme one day and then realize they were wrong the next. Good times.
On Friday, stocks got hit hard as the major indices had their worst day since the BREXIT hysterics. What was interesting is that stocks and bonds both fell precipitously on the same day. And folks, that’s just not supposed to happen.
Remember, when there is a crisis in stocks – you know the type of thing that causes stock indices to fall off a cliff to the tune of 2.5% in a single session – bonds tend to benefit as the fast money flocks to the safety of the U.S. government bond market.
However, this was most definitely NOT the case on Friday. No, both stocks and bonds in the U.S. got smoked at the same time. Why? Because some of the macro masters of the universe working on Wall Street became convinced that the Fed was secretly planning to surprise the market in a couple weeks. Instead of thoroughly telegraphing their plans, the thinking was that Yellen & Co. needed to gain back their lost credibility – and fast.
Exhibit A in the bear case Friday was the fact that the FOMC had hurriedly cued up Fed Governor Lael Brainard for a special speech on Monday. The fear was the Brainard, who is a well-known ‘dove’ (in case you are wondering, Investopedia defines a ‘dove’ as: “…an economic policy advisor who promotes monetary policies that involve low-interest rates, based on the belief that low-interest rates increase employment. Derived from the placid nature of the bird of the same name, the term is the opposite of ‘hawk.’”), was being rushed to the microphone in order to provide cover for a rate hike at the September 20/21 Fed meeting.
This despite that fact that the Fed Funds futures market was projecting the odds of a September rate hike somewhere in the low 20% zone on Thursday.
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