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Monday, August 29, 2022
Today's newsletter is by Brian Sozzi, an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
Upon a little bit of weekend reflection after the Dow crashed more than 1,000 points on Friday, I have come to terms with something.
The Federal Reserve has historically angered me.
When I started in finance as an analyst on Wall Street, I remember watching then-Fed chair Alan Greenspan dodge simple questions. I then watched as Greenspan vanished into the sunset after a housing crash he helped cause by keeping interest rates too low for too long. No justice rained down on Greenspan for his role in the Great Recession.
All of that angered me.
Next up was Ben Bernanke. I dug Bernanke's calm demeanor, but there were moments he seemed detached from the realities playing out in markets during a housing crisis caused by Wall Street’s greed. Bernanke upset me sometimes, but not as much as Greenspan.
Then we had Janet Yellen, who many believe raised interest rates too soon in 2015. That wasn’t well-received at the time, and I remember being fired up in the moment. Yellen is currently Treasury Secretary, despite admitting earlier this year she was wrong about the severity of the COVID-induced inflationary outbreak.
More rewards for wrong decisions by Fed policymakers. Does it ever end?
This brings us to current Fed Chair Jerome Powell, whose latest mistake was badly misjudging inflation. Powell is being forced now to play catch up — and is damaging investor psyches and hurting market confidence in the process.
Here are five problems for markets I think Powell’s Jackson Hole speech caused:
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Fundamentally bad companies such as Bed Bath & Beyond will face much higher costs of capital at a time when they need a lower cost of capital. Queue bankruptcy risk for struggling companies as they contend with the iron fist of Big Powell.
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Some of the most crowded trades on Wall Street — namely big cap tech momentum names like Apple and Amazon that love a low rate backdrop — may be used as a source of funds in coming months as investors brace for more market volatility. That selling could feed through to other parts of the market.
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Earnings growth is likely to slow further into 2023 as companies deal with a higher cost of capital and weakening top lines.
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A lack of trust in what the Fed is doing could weigh on the wealth-building initiatives of households, almost freezing them in their tracks and damaging their spending plans.
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As Powell hinted, expect “pain” as the Fed “stays at it” with respect to raising interest rates. Pain in this case could mean job loss and lower wages at a time of still high inflation.