Latest / Bull Market Conversations with Fexingo: Rallies, Momentum, and Riding Market Strength / How Bull Markets Survive Fed Chair Transitions
Transcript
- Lucas: So Alan Greenspan died yesterday at 100 years old, and it got me thinking about something we don't talk about enough — how bull markets survive a change at the top of the Federal Reserve. Luna: You mean the transition itself, not just Greenspan's legacy? Because his legacy is everywhere in this episode we just recorded — the whole low-rate, 'irrational exuberance' era. Lucas: Exactly. And it's timely because we're living through a transition right now. Kevin Warsh took over earlier this year, and there's been this phrase floating around — 'regime change but in a velvet glove.' The markets have taken it in stride. The S&P 500 is at 7,473. The Russell 2000 is up 1.3% in the past five days. Luna: Right, but that's the interesting part — markets usually do take it in stride. When Greenspan succeeded Paul Volcker in 1987, the S&P 500 actually rallied. Even though Volcker had just crushed inflation with double-digit rates. Lucas: That's the historical pattern I want to drill into. Because the conventional wisdom is that a new Fed chair creates uncertainty, and uncertainty is bad for stocks. But the data says the opposite, at least for the first year. You look at the volcker to greenspan handoff in August '87 — the market was up about 6% in the two months after. Luna: Even with the crash coming two months later? That's a tough counterexample. Lucas: Fair point — but the crash was more about portfolio insurance and overvaluation, not Greenspan. If anything, Greenspan's quick rate cut after Black Monday is credited with stabilizing things. But let's look at a cleaner example. Bernanke to Yellen, February 2014. The S&P 500 was around 1,840. It was up about 11% a year later. Luna: And Yellen to Powell? Early 2018. The market had that sharp correction in February, but by the end of the year it was basically flat. Not a huge rally, but not a disaster either. Lucas: Right. So the pattern seems to be: markets price in continuity, not disruption. Especially when the new chair signals they'll stay the course. And that's exactly what Warsh has done. He's kept the fed funds rate at 3.63% for the past month. The interest on reserve balances is unchanged at 3.65%. It's a deliberate signal of no policy surprise. Luna: But Warsh is a different kind of choice. He's a former Fed governor, but he's also a former Wall Street mergers and acquisitions lawyer. He's more market-oriented than some of the academics we've had. The 'velvet glove' line — I think it captures that he's not trying to shock the system, but he's also not afraid to make changes at the margins. Lucas: The markets seem to agree. The Russell 2000 is up 1.3% in the past week. That's small caps outperforming large caps by a wide margin — large-cap growth, measured by the IWF, is down 2.1% over the same period. Luna: So the bull market is broadening out. That's typically a sign of confidence. When small caps lead, it means investors are comfortable taking on more risk. And they're comfortable doing that under Warsh. Lucas: Which brings us back to Greenspan. He was the maestro for a reason. He navigated the 1987 crash, the savings and loan crisis, the dot-com boom. But one of his under-appreciated skills was setting expectations for his successors. He made the transition look seamless, and that set a template. Luna: It's almost like a playbook. You want the new chair to be a known quantity. Warsh was a Fed governor before. He was on the board during the financial crisis. He's not a blank slate. Lucas: Exactly. And that's why this bull market has been able to keep running. You look at the data — nominal GDP is at 31.8 trillion, real GDP growth is 1.6% annualized. Not blistering, but steady. The Fed has found a groove. Luna: I want to push back slightly though. The market has been ignoring some geopolitical noise — China's shopping festival growth slowed sharply, and there's the ongoing trade tension. But the Russell 2000 is still up. So maybe the broadening is also a sign that investors are looking past those concerns. Lucas: That's part of the bull market psychology. When the Fed transition goes smoothly, it becomes a reason to buy, not a reason to hesitate. And I think that's the Greenspan effect. He lived long enough to see his institutional approach become the norm. Luna: He was 100. That's a full century of monetary history. From the gold standard to quantitative easing. Lucas: And he shaped so much of it. But back to today — if you're an investor, the question is whether Warsh can deliver the same kind of stability for the next leg of this bull market. The early signs are good. Luna: Speaking of stability, I want to take a quick moment for something that keeps this show going. You know, we don't run ads here — it's all listener supported. And it really does make a difference. A couple of dollars a month helps us keep the lights on and stay independent. Lucas: Yeah, if you've found value in conversations like this, especially during a time when the market is broadening and transitions are happening, it's a small way to say thanks. You can find us at buy me a coffee dot com slash fexingo. Luna: Exactly. And honestly, it keeps us from having to sell your data or run sponsored segments that interrupt the flow. So if you're able, it's appreciated. Lucas: Back to the transition — one more thing I think is worth noting. The prediction markets have been pricing in a higher probability that Warsh stays for a full term. That's a vote of confidence from the people who put money behind their opinions. Luna: Which is exactly what happened with Greenspan. After the initial handoff, there was a sense that he was going to be around for a while. And that long horizon allowed markets to plan around his policy framework. Lucas: So the takeaway for this episode is simple: don't overestimate the disruption of a Fed chair change. If the new leader signals continuity, the bull market can handle it. And the data from the past five days — small caps up, large caps down — suggests investors are buying that message. Luna: I think that's a good note to end on. Continuity is a feature, not a bug. And Greenspan's passing reminds us that these transitions are part of the market's natural rhythm. Lucas: Exactly. Alright, next episode we'll look at why the tech-heavy NASDAQ is down almost 2% in the past week while the Dow is flat — a rotation story that's worth unpacking.