Does the Fed know something we don’t?

Sometimes too much good news can be interpreted badly. Take the U.S. central bank’s about face on monetary policy late last year. That was good news and investors responded by bidding the stock market up by 20%. But this week we may have received even better news, or did we? The Fed did more than met investor’s expectation this week at the central bank’s monthly Federal Open Market Committee meeting. Chairman Jerome Powell indicated that there would be no more interest rate hikes for the remainder of the year (after saying back in December that two rate hikes were on the table for 2019). There was even some discussion that a rate cut might be possible, if conditions merited such a move. One would have thought that would send the markets flying, and they did, at least on Thursday. Friday, however, the opposite occurred. Granted, the reaction could simply be dismissed as a “sell on the news” moment or algos playing their daily games. If so, nothing more needs to be said. But I ask myself–why would Powell and the Fed be contemplating a rate cut? The news startled some analysts and left them asking questions. Is the economy weaker than most suspect? Has the slow-down in the global economy infected the U.S. as well? Afterall, the Fed did lower their forecast for GDP growth this year from 2.3% to 2.1%, but it is still growing, or is it? As most economists know, the economy is getting a little long in the tooth; we call it a “late cycle” market. One of the reasons you might want to cut...

Two puts support the markets

What a difference one quarter can make in the stock market. Here we are in mid-March and stocks are back to almost where they were at the beginning of October. The trends have been supporting the bull’s case and investors seem happy to buy stocks. Readers should realize by now that there are two “puts” supporting this market. A “put,” in financial jargon, is an option that protects you and your investments from catastrophic losses. That’s not to say you can expect no downside, but at some point, the put will come into play and support the markets. Back in 2008-2009, the Fed’s massive monetary stimulus program characterized by record low interest rates and massive purchases of bonds, was seen as such a put. Two years ago, the Fed began to remove that support by raising interest rates and selling some of those bonds they had purchased over the years. The markets did not take kindly to that exercise, nor did the president. After a near 20% decline in equity prices last quarter, the Fed did an about face and re-instated that put by once again easing monetary policy. As a result, the markets also did an about face starting the day after Christmas. Donald Trump represents the second put working in your favor. Although he has never publicly stated it, the president regards the stock market as his barometer on how well or poorly he is running the country. Polls, he believes, are suspect and should be ignored (unless they happen to be in his favor). He reasons it is much harder to manipulate the stock market than...

Pick your poison

Investors were greeted on Friday with two nasty surprises. Both occurred in February. Chinese exports dropped by 20.7%, while in the U.S., the nation added a dismal 20,000 jobs. As you might expect, the stock market did not take the news well. What really spooked traders was how far apart these numbers were to expectations. Over here, we were expecting 180,000 jobs to be added to the payroll number. In China, where the economy had been expected to weaken, exports had been forecasted to decline by 6%, versus the prior year. Before the ink had dried on the jobs data, the administration was already sending their point man on the economy, Larry Kudlow, the Director of the National Economic Council, on television to assure Wall Street that the February data was “fluky” and should be ignored. As for China, investors there took the Shanghai Composite down by 4.4% overnight. Japan dropped half of that (-2%), even after the government said its economy grew by 1.9% in the fourth quarter of last year. It also didn’t help that the European Central Bank lowered its forecasts yesterday for growth in the Eurozone and announced more stimulus measures to support the economy. Over the last two weeks, I have been warning readers to expect a pullback in the markets, nothing too serious, but maybe a 3-5% decline. If I were to take a guess, we could see the S&P 500 Index hit 2,700 or so, before we mellow-out. From there, it depends on how low those crazy algo- trading machines decide to take us. Where is John Connors when you need him?...

Stocks on hold

February delivered good gains for the markets. All the main averages were up, continuing January’s climb toward the old highs. This week, momentum stalled a bit, indicating that investors need more good news to continue buying. A China trade agreement (or lack thereof) still takes center stage. Despite the Washington, D.C. circus surrounding the testimony of Michael Cohen, the president’s chief “fixer” for over a decade, traders largely ignored the hype. At the same time (no accident in the scheduling), President Donald Trump hoped to take the spotlight off Cohen and back on him by meeting with Kim Il Jung in Hanoi for a second summit. Unfortunately, that meeting was such a bust that Trump left early without any progress at all. One wonders if the whole trip was just a publicity stunt to draw attention away from the Cohen testimony before Congress. Traders ignored that event as well. What really kept the lid on the market was U.S. Trade representative John Lighthizer’s comments before the House Ways and Means Committee on Wednesday. “Let me be clear,” Lighthizer said,“Much still needs to be done both before an agreement is reached and, more importantly, after it is reached, if one is reached.” The trade rep went on to say that China needed to do more than just buy more of our trade goods, citing all the other concerns such as technology transfers and intellectual property theft. None of the above should be new to my readers, since it is something I have been talking about for months. However, this dose of reality flies in the face of all the hype...

When enough is enough?

For weeks now, ever since Christmas Eve, stocks have climbed almost straight up. It has been a classic “V” shaped recovery in the markets. We are due for a break, but who knows when. If I am correct, we should see either a 3-5% pullback or a multi-week period of back and forth. Either way, it should be nothing for you to be worried about. The worst, I would expect is that it would be a dip to purchase after all is said and done. Last week I mentioned that a U.S./China trade agreement may have already been partially discounted by the market. The anticipation of a deal was the fuel that has propelled this 18% gain in the markets since December. As to exactly when this next decline will occur is anyone’s guess. We could easily run another 1-2% from here if a trade deal is struck today or over the weekend, and if we do, just enjoy the ride. The contrarian in me recognizes that the “fast money” crowd is expecting a correction, like just about everyone else and they might be right. Afterall, markets are extremely overbought. Investor sentiment, while not yet near the September readings (just before the market correction), is over 50% (51.9% to be exact). That indicates some caution should be exercised on new purchases, but bullish sentiment would need to increase to something like 62% bulls before a pullback is all but assured. On the fundamental front, earnings expectations are dropping again. As it stands right now, Wall Street analysts are expecting overall results to increase by 7.8% this year, which is...

Markets gain on a hope and a prayer

Investors remain cautiously optimistic that the wall of worry that has been plaguing us for months may now be crumbling. That’s no sure thing, but at least we did have some good news this week. While most investors were not expecting a repeat of last month’s partial government shut-down, it was still a relief to see that issue put to bed on Friday. The president reluctantly signed the budget bill that Congress passed over his objections. Granted, the president did not get his wall, although now he is threatening to get the funding by declaring a national emergency on our southern border. Whether there is or is not such an emergency, by declaring one, he bypasses Congress. That will establish a dangerous precedent for future presidents who may be frustrated with the constitution’s checks and balances among the three bodies of government. Another president could use that same tactic to circumvent Congress in order to secure his or her own objectives. Nancy Pelosi, the Democrat Speaker of the House, has already indicated that, for example, that same tactic could be used in the future to restrict or even outlaw guns in this country. It could be used to balance the budget, or set term limits in Congress, or any number of things that a frustrated president might wish for. But enough politics. As I have written many times in the past few months, the markets remain China-dependent. Earlier in the week, markets swooned when reports surfaced that some of the structural issues within the Chinese economy that we want changed have become a sticking point in negotiations. A few...