Stocks Rally After Powell’s Dovish Presser

Stocks Increase Slightly

After the Fed didn’t change rates at its December meeting and Powell stated he wouldn’t hike rates in 2020 unless inflation spiked, stocks increased modestly on Wednesday. After Powell’s first few meetings led to declines in the S&P 500, the past 3 have all led to rallies. That’s because the Fed hiked rates in 2018 and cut rates in 2019.

It’s interesting to see stocks liking the Fed saying it won’t hike rates in 2020. Fed funds futures market had been pricing in the potential for a cut next year. There hasn’t been an above 0% chance for a hike in 2020 in the past few months. You wouldn’t think saying something that’s already priced in would help stocks. However, the Fed moved dovishly compared it its last meeting as 5 fewer members called for a hike, so it’s a win.

How Markets Reacted To Fed Decision, Guidance, & Presser

S&P 500 was up 0.29% on Wednesday. It was up slightly before the decision and increased slightly more after it. Nasdaq was up 0.44% and the Russell 2000 was up 1 basis point. Small cap index probably underperformed because this was a dovish decision. 

VIX fell 0.69 to 14.99. It’s back below 15 which is where it has been for most of the fall. CNN fear and greed index was down 4 points to 61 which signals greed. It’s relatively low for how elevated the stock market is.

Every sector was up except real estate, financials, and energy which fell 0.76%, 0.21%. and 0.16%. Financials fell because yields fell as the Fed was dovish. 10 year yield is now at 1.8% and the 2 year yield is at 1.61%. The decline in yields puts them in the range they have been in for the past few weeks. 

Odds of a rate cut in 2020 are now at 63.9%. There's no chance for a cut or hike because I think the economy will rebound. But not enough to generate the inflation Powell would need to see to turn hawkish. Best sectors were the industrials and technology which both increased 0.71%.

Update On Democratic Primary

Just like the group of Arizona polls, a group of Iowa polls showed President Trump beating every Democratic challenger. I’m just reporting the news. Now, I don’t think general election polls matter until the Dems pick a candidate. 

Latest New Hampshire primary poll shows Buttigieg up by one. He was at 18%, Biden was at 17%, and Sanders was at 15%. First 2 early states show it’s anyone’s game. Warren appears to be the least likely to win either as she was in 4th place in the latest polls from each state. She did better in the national poll on Wednesday. 

Biden was ahead of Warren by just 5 points. Sanders was only at 16 points. Warren’s polling average rose 0.5%, but she’s still 2.5 points behind Sanders who is 10.7 points behind Biden.

Joe Biden has been in the lead or tie for the lead in every poll since early November. That’s 17 straight polls. He’s the front runner. The next debate is this coming Thursday. Even though some are saying few people will watch because it’s near Christmas, I think it’s important because there will be just 7 candidates on stage. 

There will be more time for each candidate to detail their plans instead of talking for 30 seconds on a complex topic. This means there’s more room for conflict and for the voters to change their minds because they are hearing each one speak longer.

Very Strong Small Business Confidence Reading

November NFIB small business confidence index increased from 102.4 to 104.7. This surpassed estimates for 102.9 and the high end of the estimate range which is 104.1. It was also a 4 month high and the biggest monthly increase since May 2018 as you can see from the chart below.

Earnings trends index was up the most out of the 10 components. It increased 10 points to 2%. Net percentage of small firms with better earnings in the past 3 months compared to the prior 3 months was 2%. That sounds bad, but it’s the 2nd best reading since at least 1986. Best reading was 3% in May 2018.

This was a great report as 7 indexes were up and only 2 were down. Biggest monthly decline was in the net percentage of small businesses expecting real sales to be higher. It was down from 17% to 13%. A net 13% of firms expect the economy to improve. That’s up from 10%. Percent who think now is a good time to expand increased from 23% to 29%. 

Highest reading in this expansion was 34% which was hit in May and August of 2018. 19% of small businesses said it’s a good time to expand because of the economic outlook. However, 8% said it’s not a good time to expand because of the political climate; 18% were uncertain. This probably includes worries about the trade war and the 2020 elections.

Many small firms can’t fill job openings; labor quality is an issue. Specifically, the net percentage of small firms with job openings that they’re not able to fill increased from 34% to 38%. That’s 1 point lower than the record high this March. 

Average job creation per small business was 0.29 which was the highest since this May. A net 30% of small firms reported raising compensation which was the same as October. 26% of small firms plan to increase compensation which was up 4 percent to the highest reading since December 1989. 

Looking at the biggest issue for small firms, 26% said it was quality of labor. The record peak is 27%. Few small firms find inflation and interest rates to be their biggest issue (1% and 2%). Tax cuts helped lower the percentage naming taxes as their biggest issue; it’s now at 14%.

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  • Michael

    December 12, 2019

    And on Thursday the market soared then pulled back. And DonK bought a SPY 318 put that did well intraday. But a passed on the trade.

    • Michael

      December 12, 2019

      that is I passed on the trade. And of course it worked out well.

  • Michael

    December 12, 2019

    just a note on Tax cuts. Five years after a tax cut I've always felt like my taxes were to high. And Governments never seems to be able to cut expenses.

  • Michael

    December 12, 2019

    Small Businesses have to borrow from Banks. Small Regional banks. My view that is where you look to see if banks are an issue. And one looks at the utility consumption. Also I have an indicator I use. I call it the Interstate 65 count the trucks indicator. Count the number of truck moving north and south on Interstate 65 gives me a relatively good idea how the economy is moving.