Stocks ended the Thursday session lower on the Fed announcement, and the mood doesn’t seem to be getting any better in today’s session. Some folks are saying that the market reaction would have been even worse had the Fed announced the lift-off. But I don’t buy that. I strongly feel that the Fed has added to market uncertainty.
The ‘headline’ Fed announcement wasn’t much of a surprise – it was disappointing for me, but many in the market had been asking them to hold-off on the lift-off decision given the emerging uncertain global economic outlook. But they actually did more than that. The FOMC’s acknowledgment of the global growth concerns and market volatility ended up raising doubts about the US economic outlook, which was previously a non-issue for the markets.
In a world of slowing economies and overall uncertainty, the US outlook has been a source of stability. Post the Fed decision, there are legitimate questions about the US outlook and its vulnerability to developments in China and elsewhere.
Looked at this way, the Fed decision has added to market uncertainty. Many of us were looking forward to the Fed removing the lift-off question off the table by announcing the first rate hike and then providing a timeline for future rate hikes that took cognizance of the unstable global backdrop. They will likely do that in December (the odds of an October rate hike are low), but they didn’t do anything like that in the Thursday announcement. As a result, there is more uncertainty in the market after the Fed announcement than was the case before. This has increased the market’s downside risks.
With the Fed issue now behind us, the next major development for stocks will be the Q3 earnings season. We are still about three weeks away from the reporting cycle getting into the spotlight, but some of the early reports from the likes of FedEx (FDX), Oracle (ORCL) and this morning Adobe (ADBE) are pointing towards a repeat of what we saw in the Q2 earnings season when growth was in the negative and companies overwhelmingly guided lower.
It is hard to envision the market making a move towards its earlier highs given this backdrop
Related podcast interview:
Brian Pretti on the Federal Reserve’s Decision to Stand Pat
