The Fed is always on Wall Street's mind
What the rally on Summers’ withdrawal says about market psychology.
A losing team changes coaches and suddenly starts to win. A company replaces its CEO and its stock suddenly moves up. Lawrence Summers withdraws his name from consideration to replace Ben Bernanke as chairman of the Federal Reserve in January and global financial markets rally.
The Standard & Poor’s 500 Index ($SPX) ended the day up 0.57%. The German DAX closed up 1.22% Monday and Hong Kong’s Hang Seng finished up 1.47%. The 10-year U.S. Treasury traded to yield 2.86%.
There’s certainly an element of personal judgment in these moves. Summers has a reputation for intellectual brilliance and arrogance that led to well-reasoned worries that he would not be able to build consensus at the Fed.
But mostly the markets’ move upwards is relief that someone who had come, rightly or wrongly, to embody the possibility that the Fed would move aggressively to "normalize" its balance sheet and interest rates, won’t be in charge of the U.S. central bank.
Summers worried global financial markets -- not just because he might have moved more quickly to end the Fed’s buying of Treasuries and mortgage-backed securities than Bernanke would have if he had remained in charge of the Fed, but also because he might have pushed to raise short-term interest rates, now at 0% to 0.25%, to something like a more normal 1%.
Global financial markets may not like the idea that the Fed is about to start tapering off its buying program. But the markets are really, really afraid that the Fed won’t hold short-term rates at their current extraordinarily low levels until 2015, as it has promised.
The take-away lesson from the markets’ reaction to the Summers withdrawal is how close to the surface the markets’ worry about an early Fed tightening is. The real threat to the markets, this reaction says, is not Wednesday’s Fed decision to taper/not to taper but an easy tip in market psychology into worry about tightening -- even on very little or no objective evidence that the Fed is about to move in that direction any time soon.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund did not own shares of any company mentioned in this post as of the end of June. For a complete list of the fund’s holdings as of the end of June see the fund’s portfolio.
MSN Money on Twitter and Facebook
Copyright © 2014 Microsoft. All rights reserved.
These hot movers could rise by double digits in coming months.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.