Here’s Why the Jan. 6 Incident Was Pivotal for SPDR S&P 500 ETF Trust

A benchmark exchange-traded fund, if there ever was one, the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) has been getting a lot of attention these days, albeit for dubious reasons. Domestically, inflation is soaring, leading to concerns about economic viability while internationally, a war rages in the heart of Europe. It’s no wonder why SPY stock has struggled for traction.

The Standard & Poor's 500 is an American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ. 3D Illustration.
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On a year-to-date basis through the close of the March 11 session, shares of the index-tracking exchange-traded fund are down 12%. Further, the negativity isn’t just based on an arbitrary timeframe covering roughly the last two-and-a-half months. On a trailing-year basis, SPY stock has only gained 6%, a far cry from the momentum it accrued following the spring doldrums of 2020.

Analysts at Wells Fargo earlier today said the S&P 500 index is pulling back within an uptrend, in a technical strategy brief for clients.

But despite the red ink, those who remain bullish on the underlying index supposedly don’t have much to fear. That’s because a common assumption holds the Federal Reserve, after going through with its coy discussions about raising interest rates, will quickly go back to lowering them — or at least keeping them stable.

Per the Fed’s own definition about what it does, the central bank conducts monetary policy. Therefore, it “influences employment and inflation primarily through using its policy tools to influence the availability and cost of credit in the economy.”

Yes, inflation is skyrocketing, as your local gasoline station will be all too happy to tell you. However, combating inflation by attacking the money supply will likely yield a rise in unemployment. Following the devastating coronavirus pandemic and the economic blowback from the Russian invasion of Ukraine, rising unemployment is simply unacceptable.

Therefore, given two bad choices — hurt Wall Street or hurt Main Street — the Fed would opt for the latter. But the problem is that the playbook has changed.

SPY Stock and the Populace Effect

A pivotal reason why many analysts don’t believe the Fed has the will to raise interest rates — and thereby pop the asset bubble — is that the central bank didn’t have the will to do so before the pandemic, when circumstances were inarguably better than they are today.

Per a report from TheConversation.com, while the Fed was lowering interest rates in 2019 — a ghastly decision during a booming economy — it may have been worse to not lower them. “That’s because the corporate sector is dangerously over-indebted, creating a financial bubble.”

Indeed, The Wall Street Journal was warning about corporate debt before Covid-19 became a reality. Since the Fed can’t afford to tick off the so-called 1%, SPY stock may be in good hands. Eventually, the Fed will lower rates again, eschewing inflation control for full (or full-ish) employment.

Historically, the American people accepted their financial violation, the unilateral decision to have their purchasing power sunk. But the Jan. 6 incident at the U.S. Capitol may have been a turning point, which may bode poorly for SPY stock.

You see, the harsh fact about inflation is that it doesn’t just affect Trump partisans — it affects all Americans who may protest against what amounts to a hidden tax.

Avoiding Permanent Damage

Suffering almost comical inflation, in my opinion, the Fed only has one morally correct option: to raise interest rates and pop the asset bubble. Yes, it will lead to a recession and almost certainly, SPY stock and the broader markets will crash. But it may also spare the American public from long-term, perhaps even permanent damage.

Of course, raising rates hasn’t been part of the Fed’s culture since the Volker era. Stimulus, as we saw during the new normal, is the name of the game. However, skyrocketing inflation meant that the packages that we received were essentially the equivalent of the central bank selling us the bricks to our own house.

By expanding the money supply, the stimulus was essentially a tax. The real beneficiaries were Wall Street alpha dogs, who stupidly racked up trillions of dollars of debt. Now, their debt is much more manageable and regular folks just have to smile and take it.

Well, the Jan. 6 incident proved that beyond a certain threshold, people will protest and even riot. Therefore, I wouldn’t throw everything into SPY stock under the assumption that the Fed will simply operate business as usual.

No, this time, there could be consequences for the elites if they continue to impose what is basically taxation without representation.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.


Article printed from InvestorPlace Media, https://investorplace.com/2022/03/jan-6-may-be-pivotal-for-spy-stock/.

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