Fed Chairman Powell Didn’t Start the Fire, But May Stoke It

When the Federal Reserve's meeting and Jerome Powell’s subsequent press conference occur Wednesday afternoon, advisors and investors grappling with a host of economic concerns may find the Billy Joel hit “We Didn’t Start The Fire” playing in their heads with new verses: 

Rate hikes, inflation, Ukraine invasion; 

Consumer spending, excess lending... 

You get the idea. 

As we enter September’s home stretch, and considering Wall Street’s concerns about this time of the year, it’s fitting to remember that we're waiting for lingering risks to wealth to materialize. The stock market has withstood a barrage of bad news and worries, perhaps led by the Fed’s response to spiking inflation. 

Powell and his Fed team didn’t start this fire. The question for investment advisors as September continues and October (the month known for historic crashes in 1929 and 1987) looms is whether stagnation in stock and bond prices are the new normal. 

This week should provide some clues.  

Federal Reserve Interest Rate Decision

The Fed is expected to leave rates unchanged Wednesday, but as always, the language in the statement and the press conference dialogue may be the market-mover.  

There’s also Thursday’s monthly release of Leading Economic Indicators (LEI). They have declined for 16 consecutive months. 

When we consider that the LEI is an attempt to preview the economy ahead by using a historically reliable set of data points, and consensus estimates are for a 17th straight decline, one must ask if this is “leading” to something reminiscent of some of September-October’s worst events. And I’m not talking about the Mets-RedSox World Series back in 1986. 

The bullish case from some is that very resiliency noted earlier, as well as the damage already done to some parts of the stock market. In some cases, this has been a decade-long period of mediocre performance versus the Magnificent Seven and FAANG-type stocks. And for some US equity industries, perhaps the worst is over, and reflected in some very low price-earnings ratios. 

Consider that the $17 billion iShares MSCI EAFE Value ETF (EFV) sells at 9.4x trailing 12-month earnings, nearly a 60% discount to the SPDR S&P 500 ETF Trust (SPY). And a quality-driven small cap fund, the Pacer US Cash Cows 100 ETF (CALF) trades at only 7.5 times earnings, and even spins off a 2.7% yield. 

However, as advisors know, value is one thing, price appreciation is another. And while the former is abundant, the latter has been elusive, outside of a small segment of the global stock market. And, if the leaders break down, is that the straw breaking the proverbial camel’s back, or finally an opportunity to profit from a broader range of equity segments?  

The Fed didn’t start the fire, but on Wednesday, we will get another opportunity to see if they will put it out, or spill gasoline on it.