The past three months have served to remind investors that the most powerful entity, and by far the greatest risk to the economy and stock market, is the U.S. Federal Reserve. Not only does the Fed crush markets, the anxiety associated with building consensus of future interest hikes hits like bolts of lightning.
2018 Case in Point(s)
February 2, the jobs report showed a spike in wages of 2.9%, which “puts the Fed in play” sending the Dow down 666 points. This anxiety persists for days resulting in more massive selloffs, including a 1,033-point thumping on February 8, 2018. The so-called fear gauge, the VIX, goes parabolic that month (see VIX chart below) underscoring the introduction of fear, which has been absent from the market for a long time.
March 21, the Fed hikes rates 25 bps and the Dow closes at 24,682 that session but 23,957 the next.
June 13, the rate hike isn’t greeted with knee jerk hysteria, but the Dow slips to 24,117 from 25,201 over the next weeks.
Investors adjust to the notion of reasonable rate hikes associated with the economy, but as small speed bumps. The Fed hikes on September 26, and the Dow edges higher hitting an all-time high soon thereafter, until Jay Powell wrecks it all with comments that suggest the Fed is anything but reasonable.
Instead, those comments on October 3rd sends the fear index soaring and the stock market into a one-month tailspin resulting in the Dow losing close to 2,500 points by October 29. Powell has attempted to walk back those comments in his own way meeting with initial success.
The problem now is whether his actions will match his verbal atonement.
President Trump has been busy with carrots and sticks trying to get the Fed to hold off on hiking rates today. Some experts believe he has made it more difficult for Powell & Co to skip hiking rates because they would seem to be beholding to the White House.
Plus, its Wall Street’s job to punk the Fed.
There is another line of thought that the Fed abstaining would signal real economic trouble and would hurt the market more than help. I think the Fed boxed itself in and will hike rates today, but Powell will go out of his way to make sure everyone knows they are not on auto-pilot.
President Trump is right about the strong U.S. dollar (I have written and warned about this all year while Wall Street commentators have focused on the damage of $11.0 billion in tariffs paid, which is not even remotely close to the hit on earnings with the DXY at year and half highs).
He is also right about the Fed taking a victory lap, which Powell has done more so than Yellen. The Fed was designed as an unaccountable entity that can break economies (why so many countries in Europe gave up their own printing presses to have to beg the ECB is still one of the great mysteries) and in America has a long track record of ushering in recessions.
Jay Powell knows this, and he also knows the American public is more aware of the Fed than ever before, and if enough people understand and take action, even the creature from Jekyll Island could one day be held in account.
So, today I suspect we get a rate hike, which is fine considering the mostly robust nature of the economy. The fact is, it is already built into conventional wisdom. The gift Americans are looking for is a rationale Fed chairman, one not enamored with his spread sheets and looking out some mile-high ivory tower.
Jay Powell must let the public know he won’t mess this up.
Not sure we’ll put any cash to work today. Valuations are there, but intangibles are overruling fundamentals now. Please don’t make mistakes you could regret in a few months or even years.
Note: I’m still on vacation having wonderful time but taking in lots of notes on what I’m seeing, Can’t wait to share them.
Equity futures are higher ahead of the FOMC rate decision this afternoon. Dow futures had been as higher by as much as 150 points, but have been drifting lower, and are now calling for an 80 point higher open.
Companies on the move pre-market:
- FedEx (FDX) lowered its growth outlook, partly blaming overseas weakness (-7.5%)
- Glaxo (GSK) and Pfizer (PFE) are combining their healthcare companies in a joint venture
- Micron (MU) guided lower due to weaker market conditions and customer demand (-7%)
- Jabil (JBL) beat on the top and bottom line and guided revenues higher (+10%)
- Winnebago (WGO) beat on both its top and bottom line, revenues rose 9.7% (+9.8%)