January 11, 2022
Stocks continued the big bounce today into technical support.
Let’s take an updated look at the S&P 500 chart …
So, we had a 5.5% decline in this benchmark index to start the year, and now we have a sharp bounce of nearly 3% from this big technical trendline, which comes in from the election day lows of November 2020 (an important marker).
We heard from Jay Powell today, in his renomination hearings before the Senate. He did nothing to change the expectations on the Fed’s guidance on the rate path. Whether it be three or four hikes this year, we’ve just finished a year with around 10% nominal growth and over 5% inflation.
The coming year may be more of the same, and yet we have a market and Fed posturing and speculating over how close to 1% the Fed Funds rate might be by year end. That dynamic only adds fuel to the inflation and growth fire.
On that note, we’ve been watching three key spots that should be on the move with this policy outlook: bonds (down), gold (up) and the dollar (down).
Gold was up 1.25% today, making another run at this 1830-50 level. If that level gives way, the move in gold should accelerate. As you can see in the chart, we would get a breakout from this big corrective trend that comes down from the August 2020 all-time highs.
On a related note (dollar down, commodities up), the dollar looks vulnerable to a breakdown technically …
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March 20, 5:00 pm EST
The Fed met today and confirmed the signaling we’ve seen since early January.
With the luxury of solid growth, low unemployment and subdued inflation, they have been signaling to markets, since January, that they will do nothing to rock the boat. That move has restored confidence and stock prices (a reinforcing loop).
So, the Fed has gone from mechanically raising rates (as recently as December) to sitting on their hands. And today they are forecasting no further rate hikes this year, and they are ending the unwind of their balance sheet in September (ending quantitative tightening).
This all looks like a move to neutral, but given the rate path they had been telegraphing up until the end of last year, this pivot is effectively easing — especially since these moves look like pre-emptive strikes against the potential of Brexit and U.S./China trade negotiations going bad.
With that, we have a big technical break in the bond market today. The U.S. 10-year government bond yield (chart below) broke this important trendline today.
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This trendline represents the “normalization” of market rates following the Trump election. Following the election, with the optimism surrounding Trumponomics, the market started pricing OUT the slow post-recession economic growth rut, and pricing IN the chance that we could see a return to sustained trend growth.
So, what is it pricing in now? I would say its pricing in the worst-case scenario – a no deal with China.
Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
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March 11, 5:00 pm EST
We ended last week with a 4.4% plunge in Chinese stocks. What followed, Friday morning (EST time), was an announcement that the Fed Chair (Jerome Powell) would be appearing on an exclusive 60 Minutes sit down interview Sunday night.
This is a rare occurrence, that the Fed Chair does a mainstream media interview/Q&A. These Q&A’s are typically done in Congressional hearings, following Fed meetings or at select economic conferences. The common theme: He speaks economics and policy to economic and policy practitioners.
With that, this interview with 60 Minutes was clearly a desire to speak to the broader public. In part, it was a response to the growing risks of a confidence shock (given the December stock market decline, Brexit drama and China/U.S. trade uncertainty). It was an opportunity to tell the public that the economy is doing well, despite the media’s doom and gloom stories.
Also, in part, it was an opportunity to tell the public that the Fed is there to defend against shocks and panics, and that they won’t be swayed by politics.
Powell was also specifically asked about a few of the cherry picked data points the financial media has been parading around in recent days. As we discussed Friday, without context, some of the data can sound ominous. He added context, including for the dip in retail sales from December. Of course the retail sales hit was the result in the knee-jerk swing in confidence that comes with the December plunge in the stock market. He said they would be watching the January number closely. The January number today, indeed, was strong.
That (the interview and the confirmation of the retail sales data) was a catalyst for a big bounceback in stocks today.
Powell is following the script of the Ben Bernanke. When Bernanke was directing the Fed through the storm of the financial crisis, he (and the Fed) were being killed in the media. And the media set the tone for global leaders to take shots at the Fed too. So, Bernanke took to 60 minutes to speak directly to the people – to set the record straight. That interview set the bottom in the stock market — and it turned the tide in global sentiment.
Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
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June 13, 5:00 pm EST
Watching the media and expert community digest the Fed decision is always interesting.
They are all programmed to home in on the worst-case scenario. It’s very similar to the way they parse politics.
In this case, the Fed projected an extra rate hike this year. They were projecting three hikes for 2018. Now they are projecting four hikes for the year (two of which are now in the rear-view mirror). Why an extra hike? Is it because they want to disrupt the recovery and undo all of their efforts of the past decade to manufacture that recovery? No. It’s because they think the economy is good! In fact, Powell (the Fed Chair) said “the main takeaway is that the economy is doing very well.”
And when asked about the impact of tax cuts, he said, we’ve yet to see the benefits. But, it should “provide significant support to demand over the next three years … encourage greater investment … and drive productivity.” This is exactly what we stepped through last week in my Pro Perspective notes (here). We laid out the components of GDP (consumption, investment, government spending and net exports) and we talked about the setup for positive surprises feeding into an economy that’s already running at near 3% growth — because pro-growth policies are just beginning to show up in the data!
With that, it should be no surprise that the Fed feels more comfortable telegraphing another hike, from what is still very low levels of interest rates.
Now, what is the negative scenario the pundits have been harping on? The yield curve. With the Fed gradually walking up short term rates (rates they set), the benchmark market interest rates (namely the 10-year government bond yield) has been soft. That creates yield curve flattening, which gets the bears excited that a yield curve inversion could be coming (a good historical predictor of recession).
Why is the 10 year yield soft? As we’ve discussed, the two major central banks that are still in the QE game have been anchoring longer term interest rates through their outright purchases of global government bonds (including lots of U.S. Treasuries, which keeps a cap on yields).
On that note, we have the ECB tomorrow. And the Bank of Japan will meet on monetary policy tomorrow night. The trajectory of global monetary policy is UP. And the more the Fed does, the more it forces that timeline elsewhere in the world to follow the Fed’s path on normalizing rates. The ECB will be following the Fed normalization path soon. And the Bank of Japan will be last. And when we get hints that it’s coming sooner rather than later, the yield curve will start steeping, and the bears will have a very hard time justifying their “sky is falling” view.
February 27, 4:00 pm EST
As we discussed yesterday, the minutes from the most recent Fed meeting (which was still under Yellen) gave us some clues about the tone of a Powell-led Fed. They acknowledged the lift they expected from fiscal policy, which we didn’t hear all of last year, despite the clear telegraphing of it from the Trump administration. Powell was Trump appointed. And it looks like the Fed messaging will now reflect that.
This is from his prepared remarks today:
“The economic outlook remains strong. The robust job market should continue to support growth in household incomes and consumer spending, solid economic growth among our trading partners should lead to further gains in U.S. exports, and upbeat business sentiment and strong sales growth will likely continue to boost business investment. Moreover, fiscal policy is becoming more stimulative. In this environment, we anticipate that inflation on a 12-month basis will move up this year and stabilize around the FOMC’s 2 percent objective over the medium term. Wages should increase at a faster pace as well.”
So he’s bullish on economic output, wage growth and therefore, inflation. That’s bullish for rates. And, for the moment, what’s bullish for rates is bearish for stocks.
Oddly, on the same day Powell had his first testimony to Congress, the two former Fed chairs (Bernanke and Yellen) thought it was acceptable to host a chat about monetary policy this afternoon at the Brookings Institute.
It looked a bit like a partisan counter-punch. The same two former Fed Chairs that were, not long ago, begging Congress for fiscal stimulus to take some of the burden off of monetary policy, continue to (now) criticize the move. In fact, in Powell’s statement, he called the lack of fiscal response from Congress in past years, a headwind: “some of the headwinds the U.S. economy faced in previous years have turned into tailwinds: In particular, fiscal policy has become more stimulative.”
The takeaway from our first look at Powell: He doesn’t sound like a guy that will risk choking off the benefits of fiscal stimulus with overly aggressive “normalization” of monetary policy. That’s good.
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