Yes! The man is still making it rain, but Wall Street wants more and needs more. The Street wants that helicopter money, which is really what we are getting but “we” are also spoiled.
The Fed will continue its currently monthly Purchases:
- $80 billion in Treasuries
- $40 billion in Mortgage-Backed-Securities (MBS)
To see the chart, click here.
But Really, What’s Next?
The script has become all too familiar. What the market wants from the Federal Reserve, even though the monetary policymakers are promising more with only two dissenters, is a Fed that’s ready to crank up the printing presses to full blast (whatever that is?).
Of course, it didn’t help that the questions were so mundane and cerebral when they weren’t too politically motivated.
So, it happened again. The market got stoked for Jerome Powell’s press conference, bidding major indices substantially higher. Then investors became dismayed during the question-and-answer period, and major indices began to stumble. We continue to see investors formulate conclusions about the Federal Open Market Committee (FOMC) gatherings; they’re all pumped up, and then they leave those sessions with their hopes bashed with their tails between their legs.
Powell’s Defiance
Chairman Jerome Powell walked to the mic with a chip on his shoulder, ready to defend the (new) mission and tactics of the Federal Reserve under his watch. He began proudly talking about the Fed’s changes to “clarify” their mission, which redefines maximum employment. In the past, low unemployment of 4.0% would be considered “full” employment. The assumption was it would trigger higher wages, and higher wages would trigger inflation.
Powell discovered in late 2018 and early 2019 that is not necessarily true and that it’s providing cover for his new mission, which is (real) maximum employment. In the past, a 4% unemployment rate masked much higher rates for several demographics. Powell mentioned “maximum employment” at least five times, and zeroed on his goal for 4% unemployment for the following:
- Women
- African Americans
- Hispanics
Market bulls should rejoice because if it’s successful, not only will rates be lower for at least three more years, but the final levels also augur for a change in policy (read higher rates). It will rewrite all the rules of the Fed’s engagement. That is, of course, if this all works out. Meanwhile, this new mission also masks frustration about the inability to engender higher inflation, despite throwing everything in the Fed quiver.
The Market Wants to Hear How
The one issue the market continues to have with Jerome Powell is his hesitancy to go into details on the next form of accommodation. Moreover, when Jerome Powell started to talk about wearing masks and washing hands, traders bolted for the exits. The market wants free money, not health care tips. In fact, the market gets uneasy when the Fed strays so far out of its lane.
Conundrum
The Fed had to sharpen its pencil and come up with new assumptions since the June meeting, as those numbers were far too pessimistic. With the economy coming on much faster, Jerome Powell had to answer how they could keep rates so low for so long. As it stands right now, Powell & Co. do not see inflation above 2.0% until 2022, and the Fed will let it hover above there for some time stressing seminary.
Investors want to yield curb controls and even negative rates. The purist, on the other hand, may be offended at the expanded role of the Fed to level the playing field for all Americans. However, the Fed cannot escape the benefits of rate policy, and those folks blessed to be in the stock market. Perhaps they think this will get them into heaven, or at least help them avoid blistering criticism.
Fed Assumptions | 2019 | 2020 | 2021 | 2022 |
GDP | -3.7% | 4.0% | 3.0% | 2.8% |
June | -6.5% | 5.0% | 3.5% | NA |
Unemployment | 7.6% | 5.5% | 4.6% | 4.0% |
June | 9.3% | 6.5% | 5.5% | NA |
Core Inflation | 1.5% | 1.7% | 1.8% | 2.0% |
June | 1.0% | 1.5% | 1.7% | NA |
Finally, Powell took several shots at Congress, oscillating from almost a demanding tone to almost begging for a fiscal stimulus. On that note, I agree.
The Message of the Markets
I lost count of how many times I’ve shown negative market breadth on sessions, where the broad indices were higher. Yesterday was the exact opposite. There were a lot more winners on the NYSE and NASDAQ Composite, and the up to down volume was exceedingly bullish.
This underscores the fact those monster winners ‘took it on the chin,’ along with their outsized influence on the price of major indices.
The session also points to the fact there can be a ton of winners in a “down market,” which is an important lesson for investors that might otherwise be tempted to panic and flee.
Market Breadth | NYSE | NASDAQ |
Advancing | 1,852 | 2,020 |
Declining | 1,153 | 1,381 |
52 Week High | 89 | 89 |
52 Week Low | 7 | 21 |
Advancing | 3.37B | 2.27B |
Declining | 1.30B | 1.39B |
Transportation stocks rocked again, led by FedEx (FDX), which posted strong results and confidence guidance. For those OGs that still think Charles Dow got it right back in the day, this market rally feels more real than it did a couple of weeks ago.
Main Street is the Main Street
Homebuilder confidence continues to smoke, coming in higher than expected and breaking several records along the way. In this crazy political environment, some have tried to make the housing boom a bad thing. This is the story about Americans of all stripes reaching the American Dream. I love it and hope it continues for years.
To see the chart, click here.
Portfolio Approach
I’m becoming more sensitive to declines in earnings estimates, and that might drive moves in positions that I would ride out in a less volatile environment. Note: this does not apply to every position.
My Oil Dilemma
Crude oil stocks had a great session, and we got hit with a lot of requests for ideas. I have a few legacy positions in the oil patch that are so beaten-up they are not coming back anytime soon.
I do not like to add entry points and play the average cost game – it often handcuffs investors, making them ignore huge gains on the second entry, which often goes away in time when that entry pulls back.
Today’s Session
The major indices are under pressure this morning, with steep declines at the open. Technology stocks are leading the way lower. Meanwhile, energy continues to rebound and WTI is above $40 per barrel.
Initial Claims
Claims rose 860,000 last week, above the estimate of 850,000 but down slightly from the prior week’s 893,000.
To see the chart, click here.
Continuing claims beat estimates coming in at 12.6 million vs 13 million estimate.
Exodus from Cities
Housing starts and permits came in less than expected, but a closer look at the data actually underscores the notion there is a major exodus from American cities. New starts for August fell 5.1% to an annualized rate of 1,416,000 in August vs estimates or 1,478,000. July was revised to 1,492,000.
Starts
To see the chart, click here.
Single family homes surged in housing starts and permits as multifamily demand continues to wane.
Housing Starts August 2020 | Single Family | Multi-family |
Month to month | +4.1% | -25.4% |
Year to year | +12.1% | -16.9% |
Housing Permits August 2020 | Single Family | Multi-family |
Month to month | +6.0% | -17.4% |
Year to year | +15.6% | -28.5% |
- Midwest +28.4%
- West +19.5%
- Northeast -33.1%
- South -17.7%