Stocks, Bonds, and Gold Rally On Dovish Fed Guidance

Stocks, Bonds, and Gold - Fed Helps Continue Stock Market Rally

By giving dovish guidance, the Fed kept the stock market’s rally going, in particular regarding Stocks, Bonds, and Gold. Up until this meeting, the stock market had declined on 9 of the past 10 Fed meetings.

That was the worst string of performances since at least 1994. In order to make a new record high, the market needed a dovish Fed, improved economic data, or a trade deal with China.

On Friday, the industrial production and retail sales reports were solid. On Wednesday we got a dovish Fed that will cut rates twice if there is an all-out trade war.

Personally, I don’t think rate cuts can solve all the issues a trade war creates. However, rate cuts do push down the dollar which helps multinational profits. In the past 2 trading sessions the dollar index fell from $97.64 to $97.05.

Dollar Index still within its recent range.

Stocks, Bonds, and Gold - As you can see from the chart below, the Fed cut rates modestly in 1995. These insurance cuts helped the economy avoid a recession.

The Fed then kept rates the same for almost 3 years. It would be hugely bullish for investors if the economy avoids a recession for another 3 years as most CFOs see a recession within the next 18 months.

I still think the economy needs a trade deal with China to assure a recession won’t happen. Problem is it’s very tough to handicap when and if there will be a deal.

Both sides want a deal and President Trump is facing re-election in November 2020. However, that logic has been wrong for the past year as tariffs have been issued and negotiations haven’t gone anywhere.

Stocks, Bonds, and Gold - Specifics Of Wednesday’s Rally

Stocks, Bonds, and Gold - Every rally is very important now because the market is close to its record high. S&P 500 increased 0.3% to 2,926.46. Its record high is 2,945.83.

The stock market has had a spectacular June as it is already up 6.34% month to date and there are still 7 more trading sessions left. This is the best month since January when the market increased 7.87%.

There is still room to beat that. S&P 500 is up 16.74% year to date as it is about to end the first half on a positive note.

Stocks only fell in May.

Stocks, Bonds, and Gold - CNN fear and greed index actually fell 2 points to 42. That’s because junk bond demand is in the extreme fear category and stock market breadth and stock versus bond returns are in the fear category.

Only the net new 52 week highs and lows on the NYSE is in the greed category. It’s possible the index shows fear with the market at its record high. That’s something I wrongly predicted wouldn’t happen.

Nasdaq increased 0.42%, Russell 2000 increased 0.35%, and VIX fell 5.41% to 14.33. Gold was up 1.26% on the Fed’s dovish guidance.

Even though this was a solid day, the sector performance makes it look like the ‘risk off’ trade was in play. Utilities, consumer staples, and real estate were up 0.81%, 0.41%, and 0.68%. Financials fell 0.21% because rates fell on the dovish guidance.

Big Rally In Treasuries

Stocks, Bonds, and Gold - It’s no surprise after the Fed’s decision, yields on the short end of the curve plummeted.

2 year yield fell 12 basis points to 1.74%. It’s now at just 1.72%. 10 year yield also fell sharply as it was down 4 basis points to 2.02%. As of Wednesday night, it has fallen below the technically important 2% level. It is now at 1.98%.

There is no need to worry about the 10 year yield falling below the 2 year yield with the Fed getting ready to cut rates shortly.

10 year yield looks like it might come close to a record low. The record low was in July of 2016 at 1.36%. If the Cass Freight index is accurate and this slowdown is just as bad as the one from 2015-2016.

There’s no reason the 10 year yield can’t fall further. Bond market is signaling a deep economic slowdown. While the stock market is signaling the economy is fine.

Stocks, Bonds, and Gold - Both stocks and bonds have been rallying almost all year.

Fed’s guidance pushed the odds of a cut in July up to 100%. Only question is if it will be a 25 basis point or 50 basis point cut. There is a 28.1% chance the Fed goes with the latter.

In 4 of the past 5 cycles, the Fed has cut rates by 50 basis points with its first cut. But the Fed has little room to cut rates this time.

If the Fed cuts rates 50 basis points in July, then what will it do when an actual recession comes along? Similarly, the odds of multiple cuts by the end of the year increased. There is now a 68% chance the Fed cuts rates at least 3 times.

Economic Projections

Stocks, Bonds, and Gold - As the table below shows, the Fed lowered its long term projection for the Fed funds rate from 2.8% to 2.5%.

That means the Fed funds rate is right up against that level and is set to go below it later this year. The Fed didn’t change its projection for GDP growth and the unemployment rate.

Since the Fed is cutting rates because of the decline in inflation, it’s no surprise it lowered its projections for PCE inflation and core PCE inflation.

As you can see, the Fed sees 2019 and 2020 PCE inflation at 1.5% and 1.9% instead of 1.8% and 2%.

Stocks, Bonds, and Gold - A big reason for that weakness is oil prices.

Core PCE estimate revision was less severe, but more important since the Fed uses it to set policy.

Estimates for core PCE inflation in 2019 and 2020 are 1.8% and 1.9% instead of 2% for both.

Fed finally acknowledged that the decline in inflation isn’t transitory. Neither is this economic slowdown as it has been going on for a couple quarters and shows few signs of ending.

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1 Comment

  • George Chadwick

    June 20, 2019

    The SPX pushed up so fast into a triple top area, and triple tops are rare enough in themselves, and I suppose quadruple Tops are almost unheard of, so it basically pushed right through from a V bottom. Interesting times! Especially for summer.