No More Recessions, But The Downside Is...

The narrative coming out of the Federal Open Market Committee (FOMC) press conference is the Fed isn’t going to cut interest rates anytime soon because Jay Powell & Co believe decelerating inflation is transitory. I think he’s wrong. He’s ignoring the new Amazon (AMZN) world of deflation that’s having an even more profound impact on inflation than the Walmart (WMT) disinflation imported from China. 

When asked about low inflation that clearly hasn’t been transitory, Powell acknowledged it’s bedeviled all central bankers, but the Fed has gotten closer to its inflation target. Still, it was mentioned that outside of the period during the build-up of the housing bubble, core inflation has been historically low.

Powell admitted the problem with lower consumer inflation expectations is unreasonably low inflation expectations. Currently, the Fed is reviewing its monetary strategy.

Going into the press conference, there were five potential reasons the Fed could cut interest rates:

• No Inflation
• No Banking Liquidity
• Make Economy Stronger
• Make up for December Rate Hike
• Weakening Economy

While it’s far-fetched that the Fed would raise rates to help a strong economy, Powell and future Fed chairs will have to grapple with public and political pressure to use their magic money-printing machine for the greater good.

It’s a role that the Fed thinks is already going through its dual mandate on inflation and employment.

When Powell speaks about the role of the Fed, his posture improves and there’s visible pride in their handiwork, which goes back to saving the economy at the onset of the Great Recession. That’s his view, along with many others, myself included. I think the Fed has been too focused on saving banks.

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Be that as it may, I don’t think the Powell Fed is going to hurt the economy until there are clear signs of an inflation risk. There is a chance the Powell Fed could cut rates this year, although it’s less of a chance than 24 hours ago. 

No More Recessions

It’s taken as an inevitability; and yet, some smart folks have opinions, pondering the possibility whether the U.S. can avoid future recessions. I’m pretty sure that was the promise when the Fed was created in 1913. It hasn’t worked that way. To be sure, some nations have put in long stretches without a recession:

• Japan 1961 to 1993
• Netherlands 1982 to 2008
• Australia 1991 -

Now, some are saying tools created during the Great Recession will prevent recessions in the future, but also limit upside growth.

The Rally Blinks

Wednesday was a tough session for the market, which has been looking for a tough session for a long time. The market breadth was ugly, except for 52-week milestones:

NYSE

• 206 New Highs
• 37 New Lows

NASDAQ

• 115 New Highs
• 53 New Lows

The down volume on the NYSE was 2.8 billion against 786 million shares on the upside, while the NASDAQ saw 1.5 billion down volume, versus only 690 million up volume.

Timber!!!

The ‘Pain of Missing’ earnings was on full display yesterday. This is what happens when everyone from management to Wall Street analyst sandbag earnings predictions. When those low hurdles can’t be cleared, guidance is subpar, so watch out.

• Clorox (CLX): -7.24%
• Molson Coors (TAP): -7.54%
• Garmin Ltd (GRMN): -6.60%
• Twilio (TWLO): -6.25%
• SS&C Technologies (SSNC): -11.56%

Great Year Inflection or Pause

Year-to-Date

• S&P 500: +16.6%
• Dow Jones Industrial Average: +13.3%
• NASDAQ Composite: +21.3%
• Russell 2000: +16.9%

I have always said it’s the session after the FOMC meeting ends that matter more than the last two hours of trading when selling triggers additional selling. The session did remind investors that most stocks have had great years in four months, so some are priced for perfection.