November 15, 2019
We’ve talked about the melt-up scenario for stocks heading into the end of the year. That’s what we continue to get.
We’ve had nine new record closes over the past fifteen trading days for the S&P 500.
But remember, just six weeks ago, the bears were all excited about the weak manufacturing data — reported at the weakest level in 10 years.
What changed?
I would argue that the sliding manufacturing data increased the urgency for Trump to get something done on trade, given the developments in markets and the timeline on next year’s election. China was in town for another round of negotiations and, to the surprise of many, the rumors immediately started circulating that a “limited deal” had been struck. By the end of the week, the President was in the Oval Office shaking hands with the Chinese Vice Premier on a deal (in principle).
Add to this, the weak manufacturing data also solidified another rate cut to come at the Fed’s October 30th meeting.
With these events in early October, stocks have gone on a 9% run from those October 3rd lows. Let’s take a look at a chart that I suspect will break-out next week, to play catch-up to the broader market.
 |
November 13, 2019
Powell’s testimony to the Congressional economic committee today was a reminder for markets that the Fed has its foot on the gas.
Remember, in just the past 11 months, the Fed has not only stopped raising rates, but they’ve cut rates three times. And it has gone from shrinking the balance sheet (quantitative tightening) to expanding the balance sheet again, with an eye toward buying almost half-a-trillion dollars worth of Treasury bills by the second quarter of next year.
Why does the Fed have its foot on the gas? To hedge against the risks of an indefinite trade war. An indefinite trade war can erode confidence (which it has), which can slow economic activity (which it has). And despite the signals of an impending “limited” deal, the Fed has the luxury, given the low inflation environment, to take the position of assuming the worst-case scenario. It should be there until given a good reason not to be (like a trade deal, followed by booming data).
Remember, it has told us for the entire year that it will do whatever it takes to sustain the economic recovery. It’s an aggressive statement, and they have indeed taken an aggressive stance.
The intent is to promote confidence, promote risk taking, which promotes higher stocks. With that, we get another new record high close today. That puts us up 23% on the S&P 500. And the history of the past decades tells us that, in this highly interconnected global economic recovery, the S&P 500 is not only the barometer of global sentiment, but can also be the driver of global sentiment.
November 12, 2019
Trump touted the strength of the economy in a speech at the Economic Club of New York today.
Market folks were looking for something new. They didn’t get it.
Most were looking for him to implode the status of a China trade deal. I was listening for some hints on turning focus to infrastructure–the yet to be addressed big pillar of Trumponomics. What we did hear, loud and clear, was another hammering of the Fed, which I suspect is related. How?
How do you pay for a massive infrastructure spend (maybe in the neighborhood of $2 trillion)? An infrastructure bond.
By orchestrating an indefinite trade war, Trump has forced global interest rates back toward record lows (if not beyond). If he had his way, the Fed would have slashed rates more aggressively, and market interest rates on our sovereign debt would have plunged into negative territory, as it has for much of the rest of the world (including Europe). Consider this: In August Germany sold 30-year government bonds for zero interest!
Trump may have a chance to sell a 50- or 100-year infrastructure bond, not for 0% interest, but maybe for 2%-3%. That’s still incredibly cheap money, and the global demand (given the state of global rates) should be plentiful.
