Market Commentary 12/31/19

Repo Man

Repo Man was a 1985 science fiction black comedy that became a cult classic. The main character was Otto Maddox, a punk rocker in LA who lost his job, lost his girlfriend to his best friend, and found that his hippy parents had squandered the money that they set aside for his education. While wandering the streets he is offered the opportunity to work repossessing cars, which he initially refuses. He changes his mind, and Otto, the once reluctant repo man, learns of a Chevy Malibu with a high repo bounty. The car is apparently possessed by aliens, but Otto and a mechanic from the repo shop finally grab the car, and when they do it suddenly flies them over the LA skyline and into space.

Early on, Fed Chairman Jerome Powell seemed to be a reluctant repo man, and some of his critics probably hoped that he would get launched into space, as well. Remember that early last year Powell set Fed policy on a course to normalize interest rates and reduce the Fed’s balance sheet as the economy showed signs of improvement. That policy raised concerns among critics who lobbied for additional stimulus, but the markets seemed to take it in stride. Things changed later in the year amid signs of economic uncertainty, compounded by Powell’s reluctance to slow the balance sheet runoff. Late in the year the markets reacted negatively, driving large-cap stocks down 15% and small-cap stocks down over 20%. As the markets hit bottom on December 26, Powell clearly made the decision to terminate the balance sheet runoff and lower rates. When the change was announced early in 2019 the markets reacted immediately, beginning a rebound that pushed the stock markets up and interest rates down.

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