Did the FED Really Disappoint?
So yesterday morning I told you that the S&P had finally done it – recovered from the crisis and pierced the 2020 highs established in February… and then I asked – “OK, Now what?” Was that supposed to suggest something specific? Was it a sign that the virus and the lockdown was over? Was it a sign that stocks can only go up? Was it a sign that it’s ‘all good’?
In fact – it was none of that… the move by the S&P does not suggest any of that… It does though make you feel good when you go back and look at your IRA, 401K or other retirement portfolio… because if you are invested in the markets – the value of that investment has risen and risen nicely off the lows of the March pandemic. But is it ‘all good’?
Hardly… the country is still in the midst of a pandemic crisis, millions remain unemployed, small businesses hit the hardest, GDP is deeply negative – although it is expected to ricochet back into positive territory in the 3rd qtr… Chaos is alive and well in DC over stimulus measures and now 90 Democrats are calling for the immediate removal of Postmaster General DeJoy, on top of everything else, in an attempt to stop/halt the postmaster from changing one iota of the USPS while trade tensions appear only to be getting worse… as Trump pushes back hard on China, Huwaei, TikTok, WeChat and publicly traded Chinese companies here in the US.
And then there is the FED and while we applaud Fed Chair Jay Powell for his attention and leadership during these very difficult times – It seems that yesterday’s FOMC (Federal Open Market Committee) minutes revealed something new… (or is it really new, or just not what the algo’s wanted to hear?). The headline hit at 2 pm and that was it… at 2:04 pm the S&P was kissing 3400 (trading as high as 3399.54) and suddenly had a mini stroke dropping 18 pts in 18 minutes… as the algo’s tried to interpret what the FED was saying… Yesterday I said that we should not expect to hear anything new… rates to remain low for months out and expect to hear plenty of support for that position from members of the FED. Nothing new here… so move on… And while the news is reporting it slightly differently – I continue to believe that nothing has really changed… the FED is committed, rates to remain low and stimulus will continue as planned. I am not getting drawn into this ‘OMG – what is the FED doing?’ mentality.
Essentially – the FED said that while they see and agreed that the economy requires greater support to recover from the effects of the virus, they did not specifically say when exactly that would happen. Leaving the algo’s to wonder what that means… I mean, here we go again – because the FED minutes did not spell it out and schedule it so that everyone can see exactly what day and hour the FED will announce and then launch another program – the algo’s and some traders throw a hissy fit… stamping their feet as they try to force even more transparency than already exists. In a WSJ article – Nick Timiraos says that:
‘The minutes didn’t offer strong signals about the timing of such a move, saying only that a number of officials believe more explicit guidance would be appropriate at some point. That suggests central bank officials are keeping their options open as they look to forge an agreement on how and when to sequence their next moves.’
Ok – that’s great… what’s wrong with that? Absolutely nothing… There should be nothing in that statement that caught anyone by surprise… It doesn’t say they are walking away or that they are going to be supportive, all it says is that officials believe more stimulus is necessary and that they are keeping their options open. I mean look – rates are at ZERO, in fact real rates are negative – if you take the recent 10 yr yield (.6525%) and subtract current inflation (represented by CPI ex food and energy of 1.6%) and you get a negative number… (0.6525% – 1.6% = -0.9475). Let’s remember – the FED has taken unprecedented actions – they have taken rates to zero and launched a slew of credit and lending programs that have injected nearly $6 Trillion into the economy. All while congress and the administration has passed $3 trillion of additional stimulus/rescue efforts and they are arguing over $3 Trillion more. So what’s the issue?
The issue is that the market has gotten well ahead itself and the economy – valuations have gotten stretched (no surprise) and prices have surged as investors search for opportunity and yield. Prices have surged as investors piled in and algo’s ran over each other to ‘get the best price’ as stocks surged. So is it any surprise that at some point everyone takes a breather? Or that investors reassess… I mean even this morning Becky Quick of CNBC fame announces that ‘the Dow has been down 3 days in a row’! OK – so what? What did we lose? Maybe 1%? All while the S&P and Nasdaq notch new high after new high…
By the end of the day the Dow gave back 85 pts or 0.31%, the S&P lost 15 pts or 0.44%, the Nasdaq shed 64 pts or 0.57% while the Russell gained 3 pts or 0.15%.
And then there was the 3rd night of the DNC convention… and it was historic by all accounts… Speeches by Hillary & Barack (single names like Madonna & Jay-Z) led the evening as Kamala prepared to accept her party’s nomination for VP. The night – all full of pomp and circumstance – although less so because it was virtual – but in the end it is historic for America. All of the speeches so far have been aimed directly at Trump, (Obama’s the most pointed) naming failure after failure – did we expect anything else? Next week during the RNC convention we can expect the same type of convention with the GOP pointing out failure after failure of the DNC… so that should not be a surprise at all and so far the markets remain unfazed… and my sense is that the markets will remain unfazed until we get closer and closer… at that point – investors will need to decide what the outlook is with a divided gov’t and Biden in the WH or with a Dem sweep with Dems occupying the majority of the seats on Capitol Hill and Joey and Jill at 1600 Pennsylvania Ave. A GOP sweep is nearly impossible and a Trump win at this point appears to be 40/60 at best… (if you believe the polls…) – So the markets have much to consider… in the 86 days ahead.
September/October tends to be a volatile period – in a regular year. It is sure to become even more volatile this year as the country deals with budget negotiations from now ‘til end of September, vaccines or other therapeutics, year-end tax planning, trade policy, trade relations between the US and Russia as Mikey (Pompeo warns both NOT to contravene the re-imposition of sanctions imposed on Iran) and finally the Presidential election.
In the end – it depends on who you are and what you objectives are… Long term investors should rest easy in the knowledge that there are long term opportunities ahead and that a well-designed diversified portfolio is the winning strategy… and if you are a short term “Robinhood’ type of trader – then there will also be short term opportunities in the daily noise… so who are you?
Overnight – stocks are tumbling… in Asia they ended lower… Japan -1%, Hong Kong – 1.54%, China – 1.3% and the ASX – 0.77%. South Korea and Taiwan falling more than 3.5% as new reports of surging virus cases steal the headlines… South Korea now reports triple digit increases for 7 days straight now… In China – the PBoC (Peoples Bank of China) announces NO change to their benchmark lending rate – with the 3 yr rate at 3.85% and the 5 yr rate at 4.65%. (this was expected – so no surprise). And then – there is always the issue of investors reacting to the latest FED commentary… and they too appear to be unhappy with what they heard or better yet what they didn’t hear…
In Europe – markets across the continent are all down by more than 1% as investors there too – digest and decipher the latest FED minutes. In fact – here is the headline:
“European Markets Fall After FED Flags Uncertainty of US Recovery” OR
“Stocks Fall After FED Flags Risk; Treasuries Climb”
And recall – the markets can deal with both good news and bad news…what it always has trouble with is ‘uncertainty’… and when that happens – the path of least resistance is always lower for stocks and higher for the ‘safety trade assets’. At 6:45 am the FTSE -1.13%, CAC 40 -1.02%, DAX -1.01%, EUROSTOXX is +0.21%, SPAIN +0.14% and ITALY +0.41%.
Eco data today includes the Philly Fed Survey – exp of 20.8, Initial Jobless Claims of 920K – again below the million mark suggesting that jobs are returning swiftly… Cont Claims of 15 mil and the Leading Economic Index – exp of 1.1%.
US futures are all over the place… as investors try to make some sense of the FED statement yesterday and as the sun rises – the losses are decreasing… It’s a moving target – as of 7:10 am Dow futures are – 48, S&P’s -6, Nasdaq +18 and the Russell is -4. Are some people overreacting? Probably… but that does not mean that we can’t peel some off here… it does NOT mean that stocks can’t or won’t go lower in the short term. They can and most likely will – so get ready… and decide – who are you? A buyer or a seller at this point?
Gold which shot up overnight when futures got slammed trading at $1960/oz is now trading – $34 at $1936/oz as futures have rallied back… The dollar index – which has plunged recently helping to support commodity prices has steadied and is up 12 cts at $93.02 – and like I said yesterday – If the market considers that the dollar is about to rebound – then expect oil, precious metals and other commodities to stall out a bit until we get clarity. We remain in the $1900/$2000 range.
Oil is down 48 cts at $42.45/barrel… but closer to breaking out and up thru resistance at $43.30…remember that we discussed the converging trendlines… and we are stuck between them… $40.65/$43.30… at some point it breaks down or breaks out… the story this morning is once again about demand destruction as the recovery from the virus slows down global demand… (Yawn…). Stick with me… demand is not going away… and producers do not want to see prices fall… Capisce?
This morning the S&P is at 3374 after surging higher and teasing 3400… before the FED minutes caused the algo’s to panic… I say – let ‘em panic… because in that panic is a silver lining… so sit tight… As futures recover – will we test 3400 again today… we may… but again – I don’t think it will ‘surge’ up and thru… Chatter about the Biden economic plan is starting to be the topic du jour and as the media picks it apart – investors will react… and while everyone expects higher taxes (as Joe already promised that) – the question is exactly what does that mean? Who will get hit, what will happen to corporate taxes, death & estate taxes, middle income taxes, billionaire taxes, state taxes, and transaction taxes (known as fee’s in an attempt to disguise them.)
Remember – put in sell orders just above the market and buy orders below to catch any ‘reactionary’ moves while you are away. Again support can be found in the 3330 range and if that fails then its 3275… but I am not saying we are going there right now… just laying out the landscape. Resistance is now up for grabs… Maybe it’s 3400 now?
Take good care –