09 Jul POWELL’S CONGRESSIONAL TESTIMONY COMMENCES WEDNESDAY
The main focus for the markets this week looks to be Fed Chair Powell’s remarks before Congress. His remarks can greatly influence the markets. As widely noted and discounted, the markets are expecting at least a 0.25% reduction in the overnight rate at the upcoming FOMC meeting. Before the June employment report, a 0.50% cut was almost fully discounted.
Goldman wrote yesterday “despite mostly encouraging news on growth and trade policy, policy maker are relying on the wisdom of crowds, raising the risk that monetary policy– in the words of former Chair Bernanke—degenerated into a hall of mirrors and takes the funds rate far away from the level justified by economic fundamentals.”
Writing the incredibly obvious, market volatility can rise considerably if monetary policy expectations are radically changed, a volatility heightened by the massive influence of technology based trading.
Last week I referenced a JP Morgan study indicating that over 60% of assets in US equites is housed in passive products and another 20% of assets are invested in quantitative trading models. The Bank writes “all told index and exchange trade funds, quants and options related strategies dominate all but 10% of all US stock trading.”
Wow! But what makes the environment potentially more inflammatory is that some 33% of trading volume in all markets happens in the last 30 minutes of trading compared with 18% in 2010.
In other words because the advent of new products, especially those that are structured to mimic the momentum of closing of the day’s trading, the markets are more vulnerable to flash crashes and liquidity blow ups according to JP Morgan.
Fortunately the Chairman’s comments/testimony is released in the morning after the market’s open however the impact and the interpretation of such can impact trading throughout the day.
Today’s environment will change but the questions when and what will be the catalyst?
About 12-14 years ago it was believed the pathway to riches was owning residential real estate. Today this illusion has been shattered given that in the vast majority of the country’s home values have yet to rebound to levels achieved over a decade ago. Many now believe it is better to rent rather than to own. [Note: The widely followed home price surveys are concentrated only in 15 and 20 cities]
I ask 12-15 years from today will passive investing be viewed in the same manner as residential real estate is now viewed with equity gains occurring only in the vast legion of unknown companies versus the leviathans that dominate today’s averages?
I must write that this not a radical view but one that was partially shared by the late Jack Bogle, founder of Vanguard and the first index fund.
What will happen today?
Last night the foreign markets were down. London was down 0.02%, Paris down 0.27% and Frankfurt down 0.91%. China was down 0.18%, Japan up 0.14% and Hang Sang down 0.76%.
The Dow should open moderately lower on partial rethinking as to the path of monetary policy. The 10-year is off 4/32 to yield 2.06%.