“It’s my party and I’ll cry if I want too…Cry if I want to….You would cry too if it happened to you!” You can almost hear this classic American song originally recorded in the 1960s echoing in the office of new Fed Chairman Jay Powell. He was officially sworn into the office at 9am Eastern this past Monday morning and the party hasn’t gone right since. Markets opened rather normally that day as some residual sell pressure from Friday followed through. It was not until the last hour of the trading day around 3pm Eastern that it seemed that markets went a little haywire. The sell-off fed on itself with a swift pace and strengthening magnitude that was enough to fracture sentiment in the market. Too many traders have short-term memories and have relegated the days of volatility to a distant memory spoken only about in folklore. In reality, it is the recent lack of market drawdown which is the aberration in history. Goldman Sachs provided a statistic that since 1929 an equity market drawdown of 5% has occurred on average every 92 days. That is once a quarter! It was over 400 days since the one that started this week. It is actually surprising that we don’t have more volatility not less given how fragmented equity trading has become and the dominant traders occupying the space.
Of course, the market does tend to test new leadership at the Fed to see how they will react. At this point, Powell has been silent but some of his lieutenants have made comments. The well-respected leader of the New York Federal Reserve Bank William Dudley commented that the equity market sell off is “small potatoes.” Perhaps the Fed is seeking to break the long-standing view that they will provide a “put” which had previously been associated with Greenspan and Bernanke. It was even joked that Yellen had a “plunge protection team” that would step in to help buoy markets should they fall significantly, the idea being that it damaged consumers’ willingness to spend (technically called the wealth effect). It is appropriate that the cause of the equity market fear is aggressive action by the central market. It is the Federal Reserve’s party after all, so the punch bowl is Powell’s to take away.