Volatility Apt to Remain High Amid Fed Uncertainty

On Wednesday afternoon the FOMC meeting culminated with no changes in monetary policy. The equity indexes rallied on the news that the Fed will continue to be accommodative and use all their tools to ensure Americans receive financial aid where needed. However, 30 minutes after this news was reported, Chairman Powell held a press conference. He reiterated the stance of the voting members and mentioned that it may take another two years to recover from the devastating effects of the COVID-19 pandemic.

That means interest rates are likely to remain at historic low levels into 2022. The committee was surprised as much everyone else at the strength in the labor department’s latest employment report. He cited that even the Fed has no idea how deep and long the impact will last. Furthermore, he hinted that the usual economic indicators will be unreliable for the foreseeable future.

In other words, the Fed is uncertain and flying without instruments. This notion spooked the stock market, meanwhile treasuries and gold rallied in response. Many stock market analysts have little guidance, which impairs quality earnings estimates, and earnings estimates move markets. When clarity is lacking, many stocks perform poorly and the havens (fixed income and precious metal) tend to do well.

What does it mean? First, volatility is apt to remain at lofty levels. Second, it will likely take a few months of consistent economic data for the Fed to determine interest rate policy. Thus, confidence and clarity may be lacking deep into Q3. The issues with China and the threat of another bout with the virus make it difficult to make mid- to long-term trades or investments. In this environment, it’s highly recommended to be well-hedged. Utilizing option spreads is probably the best approach under these conditions.

We knew the economic data would be awful in May and June, so the July reports may have more impact than usual. Thus, it appears volatility will be rather high while the summer temperatures peak as well.

John Seguin
Senior Technical Analyst
Market Taker Mentoring, Inc.