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Wall Street Correction, Is This Part of “Normalization”?

Last week’s comments from Fed Chair Powell have resonated with the markets. He said that we are a “long way” from neutral on interest rates and that the “really extremely accommodative low interest rates are not appropriate anymore”. This is a vote of confidence in the strength of the US economy, so it’s good news, right? Also, note that the Fed has indicated that they may increase rates above the neutral rate if necessary in order to restrain inflation. It seems that there is some technical support for 10 year rates above 3.00% (the yield did not “snap back”, it is staying high partly due to continued record supply). Many accused the Fed of inflating asset bubbles with years of low rate and accommodative policy. Well then, now those assets may be “marked to market” and we may be seeing the “real” values of stocks and other financials. Note that during much of today’s plunge in stocks, both stocks and bonds were selling off (which is unusual). However, there was some “flight to quality” bond buying at the end of the day, the 10 year yield dropped to 3.16% as traders noted that tomorrow’s Dow futures indicate a triple digit drop. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners