Via DataTrekResearch.com,

Watching US equities drop after Chair Powell’s press conference today, I could not help but think back almost 19 years, to 2 separate interactions I had in 2000 with my former employer Steve Cohen and equally famous hedge fund manager Lee Cooperman. The turn of the millennium was a watershed year for domestic stocks. The dot com bubble was starting to burst, but Fed Funds sat at 6.5% from June to December, the highest levels since 1991. Markets wanted either a cut or at least some reassurance the Fed Put was still in place.

On one FOMC meeting day that year, Steve had set up very short. Since everyone in the room got to see his positions, we all knew that and almost everyone was therefore short as well. The old trading room at SAC was quite small, so the energy going into the day was palpable. The best trader in the world had a point of view, and we were all going to end the day with a nice gain by piggybacking on his insight.

Except the day didn’t start off as expected. Stocks rallied at the open and all morning long. By 11am the room was sitting on a major loss. Steve was quiet – he usually was – but he knew if he just sat around waiting until 2pm he would be tempted to change his mind.

So Steve left the desk, something that rarely happened, and went downstairs to the cafeteria to have lunch with his family. I can still remember catching a glimpse of him at a large table with his wife and children, happily distracted by their presence and munching on some fish sticks. Yes, billionaires eat fish sticks…

As 2pm neared and with Steve back on the desk, things still weren’t going well. The market had continued its ascent. The Fed decision crossed the tape – no rate cut – but stocks rose further still. If you’ve never seen 30 traders anxiously trying not to stare at their P&Ls and wondering if their leader has lost his edge, I don’t recommend the experience. The only sound was Steve’s trading assistant calling out ever-higher S&P levels.

But then, around 230pm stocks stopped going up. And then it started to drop. At first just a little, and then more of a plummet. Everyone started to breath again. Steve, of course, looked exactly the same. Aside from needing a little lunchtime breather, things had worked out the way he thought.

As he left the room at 4pm, all he said to us was “That’s how you do it, boys… Have a good night.” We gave him a standing ovation. He waved on his way out the door.

The setting for the other story was an idea dinner at a steak place in Manhattan. The attendees were a bunch of hedge fund analysts and PMs, and for whatever reason Lee Cooperman – famous in NY hedge fund circles even then - thought this event was the best use of early evening hours.

Most of the conversation revolved around how much the Fed could actually do to stabilize the stock market and US economy. The consensus among the attendees – none over 40 years old save Lee – was that the Fed was powerless. The bubble was too big, animal spirits too lofty, and the US economy too exposed to the equity wealth effect.

Cooperman was quiet through this debate, but as he stood up to go he said to the table “All very interesting, but you don’t want to live in a world where the Fed can’t impact stock prices. Good night.” And with that, he was gone.

It has been a long time since those two events, but for me they bookend how I think about the role of the Fed in setting asset prices:

For a trader, the Fed is a catalyst like any other. You analyze the prevailing market narrative and decide if the event (an FOMC meeting) will live up to expectations. Today was a perfect example of that. As we outlined last night, everything from 2-year yields to Fed Funds Futures were signaling a more dovish Fed anxious to spur inflation. Chair Powell isn’t ready to go there, so markets dropped after the press conference.

Investors are more concerned with how the Fed sees the general level of stock prices and, just as importantly, the volatility of those prices. The Fed Put is more about the CBOE VIX Index than whether the S&P is at 2500 or 3000. We saw that well enough in December/January.

Summing up: when it comes to how one should “trade the Fed”, perspective and conviction are everything. The trader will see today’s action as a sign markets were overconfident in a dovish Fed. The investor will look at Fed Funds Futures still putting +50% odds on a rate cut this year and 10-year Treasuries at 2.5% and see indications that the Fed is still in their corner.