Expect Trump Trade Rhetoric Into Fed Meeting

June 11,  5:00 pm EST

Yesterday we talked about the surgical manipulation Trump is (seemingly) attempting to perform, to force the Fed’s hand on a rate cut — and therefore, to optimize the economy heading into the election.

At this stage, the harder he is on China, the lower stocks go, which puts more pressure on the Fed to cut rates.  But as the Fed has now signaled it’s prepared to act, stocks have risen, which makes it less likely that the Fed will act.

With that, yesterday, I surmised that Trump might ramp up the rhetoric as we near the June 19th Fed meeting, to keep a lid on the bounce in stocks.

On that note, Trump had some very firm comments on China trade this morning, implying he’s not willing to give any ground.  He says “we’re going to either do a great deal with China or we’re not doing a deal at all.”  He gets his demands, or no deal.  Again, as we discussed yesterday, he’s in the driver’s seat.  And he said as much today:  “It’s me right now that’s holding up the deal.”

Stocks have given some back today, after a six day rally from the lows of this recent correction.  And we get this chart going into the close…

 

 
As you can see, the S&P 500 put in a big technical reversal signal — a bearish outside day.  The last signal like this we observed was on May 1, which resulted in a 7.6% correction.  Perhaps we have a signal here of some softness in stocks to come, until we get to the June 19 Fed meeting.

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Low Yields Are Overstating Risks In The Global Economy

May 29, 5:00 pm EST

We’ve talked about the signal the interest rate market is giving: with rates at these levels, the bond market may force the Fed’s hand — forcing a June rate cut.

Still, the slide in the 10-year yield from 2.75 (in March) to 2.20 (the low today) is well overstating the risks in the global economy.  That’s more than 100 basis points off of the highs of just six months ago.  And the high to low of the last five trading days has been almost a full quarter point (23 basis points).  It makes no sense.

Many would assume it’s related due to the trade standstill.  But the IMF has only cut its growth estimate by 3/10ths of a percent from the tariff escalations.  That still projects a 3% growth from the global economy (much better than the average of the past 10-years).

Meanwhile, a U.S. 10-year and 2.20%, and German and Japanese yields well in negative territory are pricing in global recession (if not worse).  Is Japan buying U.S. Treasuries, and therefore pushing down global yields?  Maybe.

As we know, the slide in yields has weighed on confidence, and therefore stocks for the month of May.  But today, we ran into a huge technical level in the S&P 500 — the 200-day moving average.  And we had a big bounce.  I suspect we’ve seen the bottom of this move in stocks and yields.  We shall see. 

 

 

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Stocks, A Buy On This Dip

May 14, 5:00 pm EST

Yesterday we looked at the big technical support level for the Dow — the 200-day moving average.

That level held beautifully, and stocks bounced aggressively today.

Here’s a look at that chart now ….

 

With stocks bouncing after a quick 5% correction, we also have a big technical area of support holding in the interest rate market.  As you can see in this next chart, the 10-year yield is holding this big trendline into 2.40%.

So, we have a stronger dollar today, strong commodities prices, higher global stocks and higher rates.  What’s different today, relative to yesterday?  Nothing.

We have a market underpinned by better than expected economic data and earnings. And (different than December) we have a Fed that is in a relatively accommodative stand, promising to do nothing to disrupt the trajectory of the economy and stock market.  That makes stocks a buy on dips.
Fed’s 1995 Script Playing Out Again

March 26, 5:00 pm EST

Yesterday we talked about the yield curve inversion.

It was driven by the Fed walking up the fed funds rate (i.e. “normalizing rates”) over the course of the past three years.  As we discussed yesterday, with global central banks pinning down the long-end of the yield curve through QE (now led by the BOJ), there were few things better telegraphed than the U.S. yield curve inversion.

The market is now pricing in a 66% chance of a rate cut by the end of the year.  The market is arguing that the rate hike the Fed made in December, was a mistake.

When have we seen this script before?  1995.  As we discussed coming into the year, 2018 was the first year since 1994 that cash was the best producing major asset class (among stocks, real estate, bonds, gold).  And the culprit was an overly aggressive Fed tightening cycle in a low inflation recovering economy.

The Fed ended up cutting rates in 1995 and spurring a huge run up in stocks (up 36%).  That’s the bet people are making again.  But I suspect we’ve already seen the equivalent of a cut through the Fed’s dovish posturing since early January.  Remember, they went on a media blitz the first several days of January, dialing down expectations that there would be any more tightening.

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Fed Meeting This Week, But They Have Already Told Us Where They Stand

March 18, 5:00 pm EST

Stocks open the week in breakout mode.

We’ve now taken out the December highs, the levels that preceded the sharp 20% plunge.

So, now we have this chart as we enter a week with a Fed meeting on the agenda.

 

This leaves us up 13% on the year, and with another 4% climb to regain the October all-time highs.

The Fed meets this week.  With a relatively light data and news week, the Fed will get plenty of attention.  But remember, we know exactly where they stand.  They want to maintain confidence in the economy.  And they know the stock market is an important contributor (and can be a dangerous detractor) to confidence.  They need stocks higher.

That’s why on January 4th, the Fed responded to the plunging stock market by marching out the current and past two leaders of the Fed to tell us the “normalization phase” on interest rates was over (i.e. no more rate hikes).

And that’s why on March 10th (just a week ago), in response to a 4% one-day plunge in Chinese stocks and some loss of momentum in the U.S. stock market rebound, Powell followed the script of his predecessor Ben Bernanke, and spoke directly to the public through an exclusive 60 Minutes interview, to reassure the public that the economy was in good shape, and that the Fed was there to ensure stability.  If you bought stocks after both interviews, you felt no pain and have been rewarded handsomely.

With the above chart in mind, below is the chart we looked at to start the year, as we discussed the potential for a V-shaped recovery following the Fed’s January 4th strategic pivot.
From my January 4th Pro Perspectives note:
“We entered the year with the idea that the Fed would need to walk back on its rate hiking path this year (possibly even cutting, if the stock market environment persisted).  And today, just days into the new year, we get the Fed Chair Powell, former Fed Chairs Yellen and Bernanke telling us that the Fed is essentially done of the year, unless things improve … [as for stocks] We broke a big level today on the way up in the S&P 500 (2520) and it looks like a V-shaped recovery is underway, to take us back to where stocks broke down on December 3rd.  That would be 12% from current levels.” So, far so good. The Fed has stabilized confidence.  The question now is, do we get a deal with China soon?  If not, we may find a rate cut, in the near future for the Fed.  The former Minneapolis Fed president, and former voting FOMC member, is calling for a cut, as a pre-emptive strike to a slowdown.Remember, 2018 was the first since 1994 that cash was the best producing major asset class (among stocks, real estate, bonds, gold).  The culprit was an overly aggressive Fed tightening cycle in a low inflation recovering economy.  The Fed ended up cutting rates in 1995 and spurring a huge run up in stocks (up 36%).

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.
Fed On Hold Drives Green Across The Screen For January

January 31, 5:00 pm EST

With the Fed officially on hold, asset prices continue to lift-off.  But with U.S./China talks concluding today, there was the potential for a spoiler.

Trump quickly stepped in front of that risk this morning, saying that no final deal would be made until he and President Xi meet “in the very near future.”

So the expectations of a final “yea or nay” on a China deal today were managed down. And with that, the recovery in global markets finished the month of January on a strong note.

What a difference a month makes.  In December, people were beginning to worry that collapsing global financial markets would kill the global economic recovery — and maybe fuel another financial crisis.  A month later, and the S&P 500 sits just 2% lower than the close of November (before the December rout).  And in January, almost every market is in the green (from stocks to bonds to commodities to currencies).

 

Remember, if we compare this to last year, cash was the best performing major asset class (returning just less than 2% in dollar terms).

On Friday, we talked about the set up for a big run in commodities this year.  Commodities continue to lead the way.  Crude is up close to 20%on the month.  Copper is up 6% for January (the commodity known to be a early indicator of turning points in the economy), and gold is up 3.5% just in the past week.

We also end the month with another very solid opening to earnings season.  Despite all of the pessimism of the past quarter. The Q4 earnings continue to beat expectations.  Importantly, the widely held tech giants have posted good reports: Facebook, Apple and Amazon.

Importantly, with the expectations bar set low coming into 2019 (for earnings, the economy and a China deal), I’d say we finish the first month of the year in position to exceed expectations on those fronts – thanks, in no small part, to the pivot by the Fed.
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A Year Of Zero Returns — Anywhere

December 10, 5:00 pm EST

We had another big swing in stocks today, from down about 2%, to finish UP on the day.

On Friday we talked about the rise in market volatility, and what’s driving it.

It’s regime change.  For the better part of a decade we had an economy driven by monetary stimulus (and loads of central bank intervention to absorb any potential shocks to markets).  And since the election, we now have an economy driven by fiscal stimulus and structural reform.

With the idea that we now have a test to see if the economy will stand on its own two feet, without the benefit of central bank intervention, market volatility is up — an indicator of the uncertainty outcomes.

But as I said Friday, with dramatic change, the pendulum can often swing a little too far in the opposite direction at first (from little-to-no volatility to a lot, in this case).

As it stands, stocks are now down about 1% on the year.  In normal times you would see other alternative asset classes (to stocks) performing well.  Bonds would be the obvious winner — but if you owned 10-year notes you would be down about 3% on the year (about flat after the yield).  When stocks are down, and uncertainty is rising, gold tends to do well.  Not this year.  Gold is down 4.5% on the year.   What about real estate.  The Dow Jones Real Estate index is up, but small (+1.8%).  Among the best investments of the year is cash.  If you owned 1-month T-bills all year, you would be up close to 2%.  I suspect this dynamic of little-to-no return asset class alternatives will change very soon.

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Key Charts To Watch

November 30, 5:00 pm EST

As we close the week and month, let’s take a look at some key charts.

Stocks have now bounced 5% since last Friday.

And that bounce was technically supported by this big long-term trendline we’ve been watching …

And, as of this week, stocks now have the additional fuel of a more stable outlook for interest rates.  

The surge above 3% on the ten-year yield sustained that level, even in the face of a stock market decline.  That signal created fears that the Fed might be on course to choke-off economic momentum.  But that has now been quelled by the Fed’s clear signal this week that they are near the end of their rate normalization program.  The 10-year ends the week well off the highs of the past two months, and at the important 3% level.

The dramatic adjustment lower in oil prices should also be additional fuel for stocks …

An overhang of risk to global markets has been the potential for sanctions on the Saudi government.  But the issue seems to be now settled, with the sanctioning of Saudi individuals which do NOT include the Saudi Crown Prince and/or government.  And as we’ve discussed, Trump has used the leverage over the Saudi Crown Prince to influence oil prices lower (for the moment).

With that above in mind, stocks finish the week well bid.  If we can get at least a standstill agreement on the U.S./China trade war from this weekends meetings between Presidents Trump and Xi, that may be enough to fuel a melt-UP to new highs on stocks by the end of December.  It may be time for Trump to get a deal done, and solidify economic momentum to get him to a second term, where he may then re-address the more difficult structural issues with China/U.S. relations.

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Fed Signals End Of Rate ‘Normalization’

November 15, 5:00 pm EST

One of the spots weighing on the market has been the Fed’s persistent increase in interest rates.  With that, and with some soft spots showing in the global economy and a more challenging policymaking environment ahead in Washington, we were watching Fed Chair Powell’s remarks very closely late yesterday (after the market close) for some signalling that a pause on rate hikes might be coming.

Unlike past Fed heads, Powell is a plain spoken guy.  And he tends to be very clear in his messaging.  With that, he didn’t seem to have an agenda for sending a clear signal to markets yesterday. But he did have some dovish takeaways.  He said they are at the point where they have to take seriously the risk of moving too far and stifling the recovery and not moving far enough to manage inflation. On that note, he acknowledged that the level of interest rates are weighing on the house market.  And he said signs of a global slowdown are concerning.  So, he tells us they’re watching the data closely for next moves, and then he tells us some data is suggesting slowing.

Now, it’s common for other Fed governors to be out talking, between meetings, in an effort to set market expectations. With that said, the bigger signalling came today.  The Atlanta Fed President and a voting Fed governor on monetary policy (Bostic), had a prepared speech in Madrid today.  He said the Fed is in the final steps of getting to the neutral rate (which means neither accommodative nor restrictive).  He said that’s where they “want to be” and then said he thinks the neutral rate is between 2.5% and 3.5%. Rates are currently 2%-2.25% (almost the low end of his neutral range).  And he said they should proceed cautiously with rate increases.  Bottom line:  These statements suggest the Fed could be done with the ‘normalization’ process of rates after one or two more hikes.

So, we were looking for the Fed to use the weakening global growth data this week (from Japan and Europe), some softer global inflation data, and the changes in Congress, as an excuse to dial down the market’s expectations for the path of rates.  It was subtle, but I think we’ve seen it.

Indeed, stocks ripped higher on Bostic’s comments this afternoon.  The Dow jumped about 1.5% today as the comments hit the news wires.

Moreover, we’ve had some more uncertainty removed from marketsin the past 24-hours.  We now have trade discussions re-opened between China and the U.S.  And today, the U.S. Treasury has named the individuals that will be sanctioned in Saudi Arabia, regarding the murder of Khashoggi.  To this point, the Saudi Crown Price isn’t one of them, which means the Saudi government is not being sanctioned.

It’s been a violent six weeks for stocks, but the lows from late October remain well intact.  And we may now be clear for another recovery leg of this recent broad market correction.

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Market Rates Are Finally Adjusting To Fed Tightening

October 4, 5:00 pm EST

 The move in rates continued to spook markets today.  The 10-year yield traded as high as 3.23%.
Now, despite the dramatic tone you’ll find on CNBC when stocks go down, a 10-year yield at 3.23% isn’t a crisis.  And a stock market that is down 1% from all-time highs isn’t a crisis or even a “sell-off.”

For perspective, the Fed has now moved 8 times off of zero.  The leaves the benchmark (short term) rate set by the Fed at 2-2.25%, still well below long-term average rates.  And that leaves the market determined (longer term) interest rate, just below 3.25%, still well below the long-term average.  With that, rates are still low.  In fact, if we took the record low in the 10-year yield, set in July of 2016, and applied the Fed’s 200 basis points of hikes, we would have a 10-year of 3.34%.  We are still south of that.  I would argue at current levels, the interest rate market is finally pricing in sustainable economic recovery (pricing out risks of another post-economic crisis shock/slump).

Now, when rates are on the move, people immediately start talking about debt service.  On that note, consumers and companies are in as good a financial position as they’ve been in a very long time (record high household net worth, record profits) .  Household debt service ratios are at record lows.

Bottom line, the move in rates is a growth story, not a crisis story.  We have 3%+ economic growth, with low inflation and solid employment.  We may have finally returned to the level of trust and confidence in the economy that fuels “animal spirits.”

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