Something happened today that, for the last eight years, is pure heresy. The Federal Reserve raised rates by a quarter of a percent, the Fed chief said the economy's pretty good, good enough to raise rates more than we thought, and the market sold off, but not aggressively and not horrendously.
I think you could say, after a 2,000-point run up, we were going to get the selloff we were due.
But it wasn't wholesale. It wasn't a collapse. In fact, given the rarified heights we got to ahead of the meeting, and how we actually ran higher into a Fed meeting, it's to be expected. It's an extraordinary time but not so extraordinary that we could maintain the rally right into and after the hike.
There was a brief moment where the market actually cheered the hike. The Dow looked like it would pierce the 20,000 mark. But the buyers who stormed those ramparts were thrown back by profit-takers who seemed motivated to lock things in and not to bail wholesale from the market.
You know what that relatively gentle selloff means, though, after this remarkable run? I think it means we may be actually getting back to normal. We may find ourselves focused on companies and how they are doing and whether they should be owned based on their futures, not on the fed fund futures or the S&P 500 futures, which have been the key metrics so many money managers have looked at.
I can't stress enough how seminal this normalization is. For as long as I have been investing, which dates back to 1979, we have always had to pay attention to the Fed and what it's up to. There are times when the Fed can crush any rally or even the market or the entire economy if it takes rates up too much, as we saw with 17 straight rate hikes before the Great Recession.
To ignore the Fed is moronic. Last year, the Fed raised rates a quarter of a percent and the market got clobbered. It was pretty clear neither the economy nor the stock market was ready for a quarter of a point increase, even as it was telegraphed. That's because the economic growth was so uncertain, and the outlook so cloudy and perhaps weak, that it seemed out of sync with the moment.
Now, here's the irony. Fed Chief Janet Yellen gave a press conference after the rate hike. Sure enough, once again, the economic growth is uncertain, cloudy even, but this time it's not about being too weak, it is about being too strong. This time it's about whether President-elect Donald Trump's going to get this economy so hot with his troika of business goodies, deregulation, lower corporate taxes and repatriation of overseas cash, that Yellen has to be concerned that gradual and sporadic rate hikes may not be enough, so she laid out a forecast of not two but three hikes, and I thought left the door open for more.
Last year that kind of talk crushed the market but good. We were in a stunningly weak holiday season. We had oil and gas rolling over to the point where we had $300 billion in debt at risk. We had worries that housing would be crushed by any rate increases.
This time, we said yep, it was time to raise rates, makes sense, the economy's strong enough that we have to go back to rates like we used to have when business is good, something in the twos and threes perhaps, maybe even more if Trump's gambit really pays off and the price we have to pay is that we have to have a lot of quarter-point increases to get there.
Traders still held on to Yellen's every word. When the statement on the need for the increase as well as the additional increases came out, the banks led the failed charge to Dow 20,000. But then when Yellen spoke in the press conference about the need to raise in a measured fashion because the economy's strong but not that strong, that seemed to slam the door on four rate hikes, which then caused the bank stocks to roll over, taking the rest of the market with it.
Then when she said the labor market looked like it did before the recession, we had another blip up.
But then the Fed reporters couldn't help themselves. They went all Trump. They went all stock. They even asked whether there is irrational exuberance, a reference to former Fed Chief Alan Greenspan, who famously -- or you could say infamously -- said the stock market might be up too much, only to see it vault much higher after.
Yellen didn't take the bait. Not the first time. Not the second time. Not the third time. But finally she kind of gave in and gave us that comment about how things are a little cloudy under Trump, and that's when the market took its maximum dip down before it found its footing.
So, what's the real takeaway here? I think it's pretty simple. We had the big, bad event. Rates went up. But all the rate hike really did was ratify what we all knew, which is it was time to raise rates because the economy's better.
To me, the more important story here might be: Does the Trump rally now pause? We expected a rate hike. We ran up into a rate hike. We got a rate hike. Now what do we do?
Earlier this week I suggested that we rallied but good on the tripod of lower corporate tax rates, deregulation and repatriation of funds.
Since then, the rally's been on the backs of the multitude of pro-business Cabinet employees.
But remember what I said about feeding the beast. Unlike Trump, Yellen's no beast feeder. She's not trying to stimulate the economy. She just doesn't want it to get out of hand.
Trump, on the other hand, thinks this economy is a heck of a lot more weak than Yellen does. He's still campaigning about the crummy economy that he ran against. He's still saying business needs help but not from the Fed. From the White House.
In fact, we saw him meet with tech leaders today in Trump Tower, a real summit of billionaire chieftains who are responsible for much of the economy's growth but also much of the automation that causes job loss, and he was incredibly encouraging. Why does that matter? Because for the most part it looked like a room full of people who voted against him. There were plenty of traders concerned that these non-Trump people might lead to some bombastic statements about how they could be so wrong in who they like.
Instead, Trump was gracious, telling them they should pick up the phone and call him or Gary or Wilbur, meaning Gary Cohn, late of Goldman Sachs, now the chief economic advisor to the president, or Wilbur Ross, the financier who will be commerce secretary.
I found myself thinking, hmm, would President Obama have said, "Give me a call"? Or would he be more standoffish given how rich everyone in the room is and the message it says about income inequality. Suffice it to say that the beast was fed enough by Trump that we reverted to thinking about that upbeat meeting instead of a downbeat scolding, and after a decent rally from the bottom we got another wave of profit-taking.
So, it ended up being another day at the office vs. what could have been a tumultuous day where the office -- if it is a trading desk -- could have been bedlam. Call it what happens when things are normal, at least as normal as they can be with this president-elect.