For the past several months, I've fielded questions from clients about how the election results will impact the stock market and economy.
However, for investors, I believe Jerome Powell is arguably the most important figure in Washington.
Under his leadership during the pandemic, the Fed has acted swiftly to prevent a major financial catastrophe from unfolding. In an emergency move in March of this year, the Federal Reserve announced it was dropping its benchmark interest rate to near zero and launching a new round of quantitative easing. Many believe this injection of liquidity into the economy has been a driving force in the economic and market rebound thus far.
The Fed is scheduled to meet this Wednesday. Expectations are that monetary policy will remain accommodative providing key support for the U.S. economy. This two-day meeting is scheduled to end Thursday, perhaps not coincidentally on the assumption that the election would be decided by then. However, with the unprecedented number of mail-in ballots, a possible record turnout and the threat of post-election lawsuits, it may take a while until all the votes are counted.
Investors are concerned that we may see a replay of the disputed 2000 election, which saw stocks drop while the hanging chads were being counted in Florida. Bush v. Gore was finally decided by the Supreme Court in December. Back then, the Fed had been steadily raising interest rates in 1999 and 2000, even after the dot-com bubble burst earlier that year. However, unlike 2000, the Fed now appears to be in a much more generous mood, looking for ways to support the markets and the economy.
There’s an investment adage that says “Don’t fight the Fed”. Put simply, when the Fed is providing liquidity to the markets, it should be an overall positive for the stock market. At their September meeting, the Federal Open Market Committee (FOMC) held the fed funds rate at near zero and revealed that it will likely remain there until 2023.
Of course, investors shouldn’t base their decisions solely on the policies of the Federal Reserve as there are many other factors that impact the economy including geopolitical changes, oil and energy costs, global health crisis, trade policy and more. However, if Fed policy remains as is under Chairman Powell, I don’t plan to Fight the Fed.