Where Are The Sellers??

January Fed Minutes

January Minutes suggested the Fed won’t be moving rates anytime soon. That’s a reasonable assessment since inflation is low, but increasing, trade worries have diminished, and equity prices are high. We are living in a so-called Goldilocks economy which means the Fed shouldn’t move in the near term. 

Specifically, the Minutes stated, “They expected economic growth to continue at a moderate pace, supported by accommodative monetary and financial conditions. In addition, some trade uncertainties had diminished recently, and there were some signs of stabilization in global growth. Nonetheless, uncertainties about the outlook remained, including those posed by the outbreak of the coronavirus.”

It’s fair to assert the Fed is pursuing accommodative policy after its 3 cuts last year. If that’s the correct assessment, the Fed will probably be accommodative for the next 1-2 years. As you can see from the chart below, the OIS markets expect the Fed funds rate to be cut over 40 basis points in the next year. Markets haven’t priced in a cut in the last 12 months.

With phase 1 of the trade deal in place, there are less worries about new tariffs. It has been a net positive for markets even though it’s a boondoggle that will likely be bad for the economy in the long run. President Trump might even re-start the trade war after he wins re-election (if he does). 

Fed also mentioned the coronavirus which was just starting to be an issue during the meetings from January 28th to the 29th. Coronavirus is still hurting Chinese growth as road traffic in China is down 22% from normal levels. Home sales are down 90%. The Fed will surely mention the coronavirus at its next meeting in 27 days, but by the time that occurs, it will likely be almost over. 

There were only 279 new cases on February 19th which was down from 1,693 the day before. Even if you exclude the deductions, there still would have been only 628 new cases. There were 108 new deaths which brought the total to 2,029.

Fed stated it will keep rates the same in the near term. It definitely won’t be cutting rates at its March 31st meeting. There is a 90% chance rates stay the same after that decision. Fed stated, keeping rates the same “would give the Committee time for a fuller assessment of the ongoing effects on economic activity of last year’s shift to a more accommodative policy stance and would also allow policymakers to accumulate further information bearing on the economic outlook.”

If the Fed is waiting to see the impact of last year’s rate cuts before doing anything,Fed may not act on April 29th either. We’re already seeing the manufacturing sector improving in the latest data. Excluding the coronavirus, the economy is in an upswing. Fed might give the rate cuts credit for this recovery. But I think that’s wrong because this is a cyclical phase change. 

Manufacturing doesn’t stay down or up long. The Minutes stated, the “current stance of monetary policy was appropriate.” That language could change in a month, but I don’t think it will.

Fed changed its language when it stated it wanted inflation “returning to” 2% instead of “near” 2%. Also, Fed stated it is ok with inflation being above or below 2% for some time. That’s obviously the case because core PCE has been below 2% for almost this whole cycle in which the Fed hiked rates a few times. 

Possibly the Fed made that change in anticipation of core PCE inflation getting back to 2%. It probably won’t stay there long like previous instances where it increased this cycle. And Fed stated it plans to finalize its strategy on inflation by mid-year. Fed could have a range of acceptable options which would make it look more successful since it has missed its target for most of this cycle.

In the Minutes, the Fed also mentioned the possibility that low unemployment can cause financial stability risks. As you can see from the chart below, there has been a decrease in household and business debt after the unemployment rate has fallen. But that doesn’t mean we should fear an economy with a nearly full labor market. 

Unemployment rate will likely stay low in 2020 and there won’t be financial instability. Bears might suggest I’m saying this time is different. Yet it already has been different for a while. This is the longest expansion in modern history. Sometimes this time is different.  

Where Are The Sellers?

Quoting Jim Cramer, a noted bull, he stated, “What the hell is happening? Where are the sellers??” shows how much momentum this market has. S&P 500 entered the day with an over 19 forward PE multiple. But still rallied again on Wednesday. It was up 0.47% which put its total year to date gain at 4.81%.

In calling for a 7% increase this year, I’m now calling for about a 2% gain in the next 10 months. That sounds implausible when the market is up 2% in just the past month, but recognize that this rally is unsustainable. S&P 500 won’t increase another 30% in 2020. The market deserves to be up because the economy is recovering. But it can’t have another year of extreme multiple expansion because it started the year with an above average multiple. 

Even though the market is up so much that Jim Cramer is wondering where the sellers are, the CNN fear and greed index is at 54 which is neutral. It will be interesting to see where the AAII sentiment poll winds up when it’s released on Thursday.

Once again, the poster child for this rally, Tesla stock, rallied sharply. It hit a new record as it increased 6.88% to $917.42. Investors are now calling for a greater than 20% decline because this stock is in a bubble. It could easily fall as much as 40% in the next few weeks when this bubble pops. And it was a rare day for the utilities as the sector fell 1.09% That’s even though the 10 year bond yield was up less than 1 basis point. The sector has a lot to lose if the 10 year yield gets back near 2%.   

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