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Nationalist Pundit

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Stocks Dive On 1st Day Of New Fed Chair

Yesterday was a rough one on Wall Street as the Dow Jones plunged some 1,175 points, setting a new record for biggest, one-day losses. At one point, the Dow was down almost 1,600 points. However, given the value of the Dow, the loss only amounted to a 4.6% dip, not even making the top 5 in history. All of this comes as Jerome Powell took the oath as the new Chairman of the Federal Reserve Bank. Historically, it is normal for the markets to dip when a new Fed Chair takes over. Most analysts are not too concerned about yesterday′s sell off, as the overall economy is in very good shape. Even the manufacturing index hit a new record high at 59, 2 points higher than expected.




Regular readers of mine from back in my RightPundits days will recall my views on the Federal Reserve. The Fed Chairman is probably the second, if not the most, powerful man in Washington, DC. Fed policy on interest rates can make or break presidents and economies. During the Barack Obama years, the Fed kept interest rates at extremely low levels, for some time at 0%, following the 2008 Crash. They bought some $3 Trillion dollars worth of mortgage-backed securities from the big banks on Wall Street when that bubble burst. Over the next several years, the Fed then pumped another $6 Trillion dollars into the economy, nearly all of which went into the stock markets.


Yesterday′s dip has several factors behind it. First, the fact that the Federal Reserve Bank will be raising interest rates at least 3 times this year. This dove-tails into the second reason, bond prices. As bonds go up, they become more attractive to large, institutional investors than do stocks. For much of the last 9 nine years, stocks were really the only game worth playing. The third major reason for the dip is basic profit taking. That was bound to happen at some point. As prices fall on many ′Blue-Chip′ stocks, eventually, the buyers will return. Potential inflation is another factor as both the big banks and the Fed start to unwind much of the debts they are sitting on since 2008. Also, with unemployment so low, wages are beginning to increase, which will effect prices on goods and services.


But Federal reserve Bank policy and the price of Treasury bonds is a tad more elusive. There is no doubt that both will increase, the questions are how much and how fast? Normally, in a healthy economy, the Prime Rate from the Fed is usually in the 5-7 percent range. Up until 2015, the Prime was at 3.25%. Today, it is at 4.5%. The price of Treasury bonds has been even more dramatic. At one point in 2009, the 1-Month bond was down to as little as 0.02%. Today it is at 1.4%. The 10-Year Note, which much of our corporate borrowing depends upon, has been hovering between 2.75% to 3% for most of the time since the 2008 Crash. Normally, it should be closer to 4.5% to 5.5% during a healthy economy.


I would not worry too much about stocks taking a dip just yet. All of the ′Fundamentals′ are good right now, so a rebound should recover shortly. You have to admit, the markets have had a pretty good run the past 400 days. The last 90 days saw records broken for how fast a 1,000 points were gained several times. I have no doubt that we will see Dow 30,000 this year. The way things were going, I half expected the Dow Jones to break 30,000 by Easter! Maybe now it won′t happen till the Fourth of July? Heck, if it didn′t happen till Christmas that would still be pretty good!


For more REAL NEWS and views, follow Andrew Zarowny on Facebook and on Twitter @mrcapitalist.


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