Stocks Finally Don’t Sell Off In Reaction To Powell’s Presser

Stocks Rise Slightly

After FOMC meetings, Powell’s press conferences have sent stocks lower on average. This time Powell didn’t push stocks lower as the S&P 500 was up 0.33% on Wednesday. There wasn’t much room for him to surprise markets negatively. The market expected a cut and a pause afterwards. 

That’s what Fed and Powell delivered. The market was already anticipating at least a temporary end to rate cuts. Therefore, many investors couldn’t see how he could disappoint it. Turns out, we were correct. It always helps when the Fed delivers exactly what the market expects.

Changes To Fed Statement

The image below shows the Fed’s October statement along with the changes it made. As you can see from the first paragraph, the Fed stated “business fixed investment and exports remained weak” instead of “have weakened.” That statement was supported by a recent Q3 GDP report. Business fixed investment was the weakest part of the report.

A big change to the Fed statement which suggests the Fed will pause rate cuts for at least the next meeting was in the 2nd half of the 2nd paragraph. Fed originally stated, “as The Committee contemplates the future path of the target rage for the federal funds rate, it will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2% objective.” 

However, the new sentence is, “The Committee will continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path of the target range for the federal funds rate.”

It’s very clear here the Fed doesn’t want to cut rates in December and into early 2020. If the economy gets worse, it will be forced to cut in the spring of next year. It’s highly unlikely to cut in December. Economic data doesn’t support a pause to rate cuts in the sense that it hasn’t gotten better recently. 

On the other hand, with no recession risk, it doesn’t make sense to lower the Fed funds rate to near 0%. If the Fed doesn’t cut rates in 2020 and the economy recovers, it will have successful implemented a “mid-cycle adjustment.”

Fed is much closer to the zero bound than it was when it cut rates 3 times in 1995-1996 and 1998. These rate cuts in 2019 were probably more meaningful. However, any number of cuts in the middle of the cycle which don’t lead to a recession are mid-cycle cuts. 

It didn’t look like this plan would work out a couple months ago. But now the market is accepting this pause, which is a victory. The Fed still needs to get the economy going again before declaring victory. Q3 GDP report certainly suggested the slowdown is still going.

A final point worth mentioning is Esther George and Eric Rosengren voted against this rate cut as they think the Fed shouldn’t be cutting. They will get their wish in December and likely early 2020 as the market doesn’t see a cut coming soon.

Markets’ Reactions To The Fed’s Decision and Powell’s Presser

Predictably, the stock market finally didn’t decline after Powell’s presser. Stocks actually rallied in the afternoon. In the last 80 minutes of the trading session, the S&P 500 rose 0.51%. That pushed the market to a new record high as the S&P 500 is up 21.54% year to date. It has been an amazing year. One of the biggest potential short term negatives is stocks are overbought and ripe for a correction.

VIX fell 0.87 to 12.33 which shows the complacency. Few see a correction coming. CNN fear and greed index increased 4 points to 75 which means it is now in extreme greed territory. You don’t want to own stocks for the short run if investors are extremely greedy. I expect when the AAII sentiment survey comes out, there will be more bulls than average and fewer bears than average. The market isn’t at a euphoric stage, but it’s too comfortable to be a bull right now which is a problem.

Nasdaq was up 0.33%. It will probably increase on Thursday because of the positive earnings reports which I will discuss in a future article. Russell 2000 fell 0.27%. Best 2 sectors were healthcare and utilities which rose 0.78% and 0.87%. Healthcare hit a 2019 high and is very close to a record high. The index is at 94.86 and the record high is 95.87.

Biggest losers were energy and financials which fell 2.12% and 0.14%. It’s surprising the financials fell since the Fed didn’t guide for any cuts in the near term. There is only an 18.5% chance of a cut in December. And, there is a 59.9% chance of a cut by next November. 

Fed might stand pat for a while. Also, there wasn’t much action in the treasury market. 2 year yield went from about 1.62% before the decision to 1.6% at 5PM. It’s currently at 1.62%. The 10 year yield is at 1.79%. Also, tt hasn’t moved much in the past few days.

Powell’s Quotes

It’s clear from the statement that the Fed won’t be cutting rates soon. Powell solidified this point at his presser. He stated, “We see the current stance of monetary policy as likely to remain appropriate as long as incoming information about the state of the economy remains broadly consistent with our outlook.”

He said, monetary policy is, “in a good place” as “the baseline outlook [for the economy] remains favorable.” Personally, I don’t see the economy favorably. But maybe he’s more confident because phase 1 of the trade deal is nearly done. While the Fed isn’t about to cut rates soon, it’s further away from raising rates. 

Powell stated, before cutting rates there would need to be a “really significant” increase in inflation. There is no pressure to hike rates. The options are clearly, cut or do nothing. Fed will choose the latter in early 2020 if the economy doesn’t falter. 

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