The Most Unanticipated FOMC Meeting

The Most Unanticipated FOMC Meeting

Today is one of the most unanticipated Fed statement days in recent memory. How will we ever survive without hearing that “today is the most important Fed day ever”? I say that because absolutely nothing is really expected today. Chairman Jay Powell did his 170 degree turn earlier this year and the Fed is now on a new course. Okay. Maybe, I am exaggerating a little bit. Perhaps, we will hear about their plans to end their sale of bonds purchased during their Quantitative Easing programs, but that should be about it.

Financial markets have ripped since Powell’s embarrassing mea culpa in early January with stocks and bonds sharply higher. Crude oil is also up significantly and the dollar is marginally higher. Gold is basically flat.

Model for the Day

As with every Fed statement day, 90% of the time stocks stay in a plus or minus .50% range until 2pm before the fireworks take place. That should be the case today as well. After that, we usually see strength into the close roughly 75% of the time. That trend has been muted today after Tuesday’s action. However, there may be a less frequent and negative trend setting up for after the Fed which would call for lower prices in the very short-term.

No Rate Move

The FOMC is absolutely not going to touch interest rates today nor at their next few meetings either. They are effectively on hold until further notice and the odds favor the next move to be a rate cut. Besides Powell and the rest of the FOMC doing an about face in early January, a few very important pieces of economic news have surfaced lately. None come as a surprise.

First, the European Central Bank cut their annual GDP forecast from 1.7% to 1.1%. As I have written about before, for all intents and purposes, Germany and Italy are already in recession. Second, China’s economy continues to surely and steadily weaken. Finally, the February employment report in the U.S. was wildly weak although I feel fairly confident that it is going to be revised sharply higher.

Although the Fed’s dual mandate calls for maximum employment and price stability, I do not believe they can ignore what’s going on around the world. The global economy is soft. Continuing to raise interest rates here would certainly have detrimental effects on growth as well as likely strengthen our currency. Neither would be considered good for the global economy.

Right now, Goldilocks is alive and well and residing in the U.S. economy. Not too hot. Not too cold. The Fed would be backed into a corner if the U.S. economy re-accelerated again without Europe and China following suit. That would force Powell to raise rates and hasten recession.

Recession Coming in Late 2019 to Late 2020

Speaking of recession, I stand by my forecast from 2018 that the U.S. will see a mild recession beginning between Q3 2019 and Q3 2020 although I would happily be proven wrong. Economic data is decelerating. I believe we have seen the trough in weekly jobless claims along with the peak monthly new jobs created. Housing has been a challenge for some time and that does not appear to be changing any time soon. Credit cards delinquencies are spiking and auto loans, especially from millennials, are a big problem.

Don’t get me wrong. The economy is not teetering on recession. I just listed the problems. GDP is still growing, coming off a 3.1% year with 2% likely in 2019. Wage growth is the best in many years and money is flowing back to our shores. It’s going to take time for all this to wear off and some external shock to hit.

One thing I know for sure. Powell and the Fed will not forecast the next recession. Why? Because the Fed has never, ever, ever once correctly predicted recession in the U.S. or really anywhere for that matter. You could say that they are perfect in their incompetence. You could also argue that secretly they really do see problems coming down the road, but could never telegraph that publicly for fear of upsetting the markets. This is the argument I fall on the floor laughing my head off.

The Fed is always late. Had they started the rate hike cycle earlier or the asset sales, they could have avoided conducting them concurrently. I have said this from day one and never wavered; what the Fed was trying to do is like landing a 747 on I-95. It’s technically possible, but so beyond likely to be successful. In fact, as I have stated many times, it has created a fertile landscape to grow recession.

Janet Yellen & Jay Powell Are to Blame

Let’s get back to Jay Powell and the Fed. Longtime readers know that I was a very big fan of Ben Bernanke while I called Alan Greenspan the single worst Fed chair ever, or at least on par with Arthur Burns from the 1970s. I call it like I see it. For several years, I have been a very vocal critic of Yellen and Powell for trying to land a 747 on a postage stamp by raising interest rates AND selling fixed income assets, now to the tune of $600 billion a year. In the history of the world, no central bank has ever had the temerity to believe it could accomplish this without consequences.

Cue our Fed with Yellen and Powell.

This group is and has been either arrogant or ignorant or both. Look, the Fed is behind 90% of the recessions. They begin a rate hike cycle and push and push until the landscape is so fertile for recession that all it takes is a little spark. They did it leading up to the financial crisis. They did it during the Dotcom burst. They did it in 1990 with the S&L Crisis and Iraqi invasion of Kuwait.

This time, the pomposity has been taken to new heights by adding the program of what’s been labeled Quantitative Tightening. The Fed is now selling the securities in the open market that they purchased during Quantitative Easing. These sales are effectively interest rate hikes by themselves. The markets and economy cannot withstand the Fed conducting both. And although the rate hike cycle appears to have ended, the damage has been done.

Now we have Greenspan and Yellen both forecasting gloom and doom. “Run for cover.” “Crisis on the horizon.” What a joke! Yellen remarked on her way out of Dodge that she didn’t think we would have another financially related crisis in our lifetime. Now, all of a sudden, she sees a series of crisis.

Is this all in the name of selling books? Goosing demand for their 6 figure speeches? Or, do they really believe this, but just outright lied to the public when they were in charge? No matter how you slice it, Janet Yellen and Alan Greenspan are embarrassments.

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Strong Sector Leadership. Seasonal Headwind This Week.

As I wrote about last week, stocks ended their deepest and longest pullback since the Christmas bottom. And that was all of 3% and 5 days. Not much for the bears to hang their hopes on. I also commented that I wanted to see which sectors led out of that pullback since it was unlikely that the rising tide would continue to lift all ships.

Since the March 8th low, the bulls should be proud that it’s been a “risk on” rally with biotech, energy, healthcare and technology leading the way. That is fairly strong leadership. Lagging are the defensive groups plus materials and transports. That’s not bad either although the masses are all up in arms about the transports. While they do matter, I am not going put too much weight on them as they are still rallying fairly well as you can see below.

Finally, with last week’s quadruple expiration of options and futures and stocks rallying, there is a strong trend for some weakness this week. While I don’t have a strong opinion of the magnitude, I don’t think it should be a significant decline if it comes.

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If At First You Don’t Succeed…

On Wednesday, the bulls tried to break stocks above what pundits are calling the “key” line in the sand. This was the fourth such attempt in the past three weeks. As I mentioned before the first try almost always fails and the second is usually a little more emotional. After that, one of the attempts usually sticks. You can see this on the chart below. Today, is that fourth attempt and we will see where the bulls end up.

Given the run we have had this week, coupled with negative seasonality next week, my initial take is that stocks are not going to run away from here. My sense is that the fourth try will be followed by a fifth one sooner than later but not immediately. However, even if stocks pause here or mildly pullback, I don’t think it will be enough to warrant much action. There is too much strength beneath the surface.

Just look at junk bonds below. When almost everyone left them for dead (including me) last year, this group has exploded higher, ripping the faces off of the bears. I will end with an oldie but a goodie that many of you have become use to hearing. Bull markets do not end with behavior like this.

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Once Again, the Bears Get Left Behind, Waiting, Hoping & Praying

Greetings from LA! Hopefully, this is the final day of a long, three city trip. I always debate compressing my trips into fewer ones so I can get a lot accomplished with less flying. In today’s case, this massive winter storm will likely result in my flight being canceled to Denver. So, my fingers and toes are crossed that I can get back to CT tonight and not have to deal with the masses tomorrow.

Last Friday, I wrote about what looked to be some early morning weakness with the key being how stocks closed that day as I was looking for a low sooner than later. Well folks, we didn’t have to wait long for the bulls to step up. After watching the pause to refresh morph into the mild pullback all of 3.37% from high to low and -2.14% on a closing basis, the bulls decided it was time to commit some cash.

All year long, my theme has been the same and unwavering. The Q4 decline saw the masses raise hundreds of billions of dollars in cash. When stocks bottomed at Christmas, they literally took off like a rocket and have not looked back. All those naysayers have been sitting and waiting for the other shoe to drop to reinvest their cash. They have disavowed and hated this epic rally right from the get go and every day ever since. They’re almost angry at this point for being so catastrophically wrong. I spoke with a few of those managers this week and instead of doing the mea culpa, they explained that everyone should look at 6 month and 14 month returns instead of focusing on their anemic 2019 performance. Interesting indeed.

For 11 weeks, the bears’ opportunity just hasn’t come. And stocks have pressed higher and higher. As I continue to write, when so many people are looking for a pullback, it rarely comes. In this case, the pauses were one to three day affairs. The recent pullback was five days but didn’t amount to much.

You can see how all this has played out below. The big test for the stock market will come when price tries to exceed that blue, horizontal line in the coming days or weeks. Right now, I am purely guessing that stocks will have a tough time breaking through and then running higher. I can certainly see a poke above and then pause or pullback and I can see a full break through and sharper reversal lower. Ultimately, as you know, I see all-time highs across all of the five major stock market indices with 30,000 as a possibility later this year. And while I am on it, Dow 50,000 in the 2020s.

As I said to CNBC reporter Fred Imbert yesterday, I think now that stocks have seen their first pullback since the bottom, the key is to watch which sectors lead from Friday’s low. That speak volumes about the health of the rally and I will comment on leadership in the next update on Friday.

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ECB & Feb Jobs Report Says NO to Fed

Greetings from 36,000 feet as I am heading from Florida to LA.

There were two major non-financial market news items from last week which I think warrant serious attention. The first was the European Central Bank (ECB) which downgraded their view of the European economy from 1.7% growth to 1.1% growth. That may not seem like “stop the presses” news, but with growth teetering around 1%, the ECB has to be very concerned about recession across Europe and not just in Germany. With that, a more restrictive monetary policy is dead on arrival.

The other piece of news was the February jobs report which came in at an anemic 20,000 new jobs, much, much less than expected. While this number is very volatile month to month and can be revised by 50,000 or even 100,000, the February report coupled with the ECB tells us that Jay Powell and the Fed is now definitively on hold for at least the next four to six months, if not the entire year. By the way, I absolutely believe that the Feb jobs report will be revised higher by at least 50,000, but that won’t change anything in my mind.

With Europe in trouble and China fading, there is no way our Fed is going buck the trend and push the envelope to normalize rates anymore. Just look below at the yield on the 10 year Treasury Note. In good economic times that are getting stronger, long-term interest rates would be rising, like we saw into October. Since then, 10 year yields have dropped from 3.25% to 2.65%, a clear sign that the bond market is worried about economic growth.

Why does this all matter?

Conventional wisdom says that stocks like lower rates as competition for money decreases. So if the Fed is done hiking rates, stocks should like that and go up. While that premise doesn’t exactly stand up to scrutiny, it’s worth noting.

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The Pullback to Buy is Here. But the Pundits Will Worry.

The pause to mild pullback eliminated the pause as the bears sunk their teeth into the markets a little deeper on Thursday. The March 4 peak and reversal day I referenced a few days ago now has a bit more significance although indices saw their highs on February 25. I am traveling so I won’t get to pay enough attention to the chatter, but I am guessing there will be some focus on the S&P 500 falling back to its average price of the last 200 days. Ignore it. It’s nonsense in here because the line is now flat, price can whipsaw around it and the other major stock market indices are no longer all lined up.

The S&P 400 and Russell 2000 continue to be the weakest indices, showing a clear “risk off” trend. That flies in the face of conventional wisdom because the dollar has been very strong which should hurt the huge, multinational companies and help those with the most domestic exposure. In other words, the mid cap and small cap indices should be getting a little tailwind over the large and mega cap indices. But as we know, conventional wisdom doesn’t always play out as expected in the markets.

Lots of chatter lately about the Dow Transports below and how much weaker they are than the Dow Industrials. Pundits have almost universally concluded negative consequences. But the data don’t bear that out. More on this next week as it’s time to leave Fort Lauderdale and head up to Orlando.

The theme for Friday should be weakness out of the gate. I fully expect the bulls to put up a stand later this morning or right after lunch. The key will come after that when the bears try to knock the markets to new lows. I think a low is coming sooner than later and the big post-Christmas rally ain’t over yet. All those people who have been waiting and waiting for the pullback to buy will probably miss the boat in here as they always do. Now, they will worry that stocks are about to collapse. I am certainly ready to commit the dry powder I have.

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Buy Weakness Until Proven Otherwise

Stocks are continuing the recent pause or mild pullback. Monday’s action saw the indices reverse to the downside and now we’re watching to see if the market can close below Monday’s lowest level to signal further downside. The Dow, S&P 500 and NASDAQ 100 have exhibited the best relative strength with the S&P 400 and Russell 2000 much weaker this week. On the downside, I wouldn’t expect more than a few percent with the Dow likely to find a little low above 25,000.

This is all in the context of the post-Christmas rally being alive and well. Many indicators have suggested that stocks should have pulled back long before this week, but they are all in unison when saying that weakness should be bought.

On the sector front, only discretionary is really holding up better than the market. The other three key sectors are under pressure in the very short-term, but still very strong. Defensive groups like utilities, REITs and staples certainly behave well to go along with the more economically sensitive ones.

Junk bonds are digesting nicely and the NYSE A/D Line remains a rock. Don’t read too much into some of my negative comments. Stocks remain on solid footing and should mount another assault higher next quarter.

 

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Pullback Over? GDP Report a WOWZA

All week stocks have been in pullback mode but it sure doesn’t feel like it. What is the S&P 500 down from its intra-day peak? Not even 1%. Overnight trading suggests a test of 2019 highs. Again, when the masses have been sitting in so much cash all year, waiting for stocks to go down 5%, 10% and 15%, it provides a strong cushion against such a decline. The slightest bit of weakness continues to be bought, until it isn’t. And then a real pullback will begin.

This slight pause in the major indices hasn’t even touched any short-term determinants of trend. No glaring internal weaknesses. No sector warnings. No nothing. The test will come at the end of the day if stocks are near 2019 highs.

On Thursday, the government announced that Q4 GDP grew by a much better than expected 2.6%. My non-scientific stab in the dark thought it would be much lower. 2.6% with the government shutdown and collapsing retail sales is astonishing. There continues to be widespread underlying strength against pockets of despair in auto loans, credit cards and housing. I keep hearing the naysayers scream about recession coming next month, but they have been saying that since the election of 2016.

It’s really amazing. In my 30 year career, I have watched Reagan, Bush, Clinton, Bush and Obama all preside over varying economies. Almost uniformly, everyone rooted for a strong economy regardless of political persuasion. It’s certainly no secret that I was anything but a fan of Mr. Obama. However, I knew that his success would be my success. For the good of the country and its citizens, we all put politics aside and cheered for economic success as everyone won.

Today, very sadly and pathetically, that’s no longer the case. While I understand 100% how polarized our country is and how much hatred there is for Donald Trump, the country has now stooped to a new level. And I have heard it firsthand. People actually overtly and loudly root for a serious recession so Trump will fail in his reelection bid. That’s seems like treason to me. How could anyone hope for unemployment to rise? For people to lose their homes? Wipe away their savings? Raid their retirement accounts? That is about as despicable and disgusting as it gets.

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A Pullback? What’s That??

After a nearly vertical rise in stock prices since the Christmas bottom, the market seems to have put in a short-term peak on Monday. There is nothing to suggest that this will be anything more than a routine, normal and healthy pullback which could be a few days and a few percent or a longer period of sideways action.

On Monday, all five major stock market indices hit recovery highs and new highs for 2019. On Monday, all four key sectors hit recovery highs and new highs for 2019. High yield bonds made new highs on Tuesday as did the NYSE A/D Line. All of this suggests large scale underlying strength and not the end of the rally.

Former Trump lawyer, Michael Cohen, testifies before Congress today. I fully expect it to be a circus. It will interesting to see if the markets react to his testimony or questioning.

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Running Out of Descriptions

The epic rally from the Christmas bottom continues unabated. leaving more than a few people scratching their heads. The rally just isn’t conforming to historical norms and all those people waiting on the sidelines have been left behind, completely and utterly embarrassed. Actually, most of those people just keep digging their heels in to hate and disavow the rally. I can’t even count how many of those fast money guys and gals look like bigger clowns than they already are.

Stocks “should” have paused and mildly pulled back already. But I guess that with so many people watching and waiting, the market just keeps confounding the masses and powering ahead. It’s hard to believe, but the Dow is getting close to all-time highs, something I forecast for later this year. And I have been one of the most bullish on record. Just like when they laughed at my bearish Facebook last August, they laughed when I called for all-time highs in 2019.

Semis, discretionary, banks and even transports are all long and strong. High yield bonds are clicking all-time highs. The NYSE A/D Line is at new highs. Eventually, one of these morning rallies will fade and stocks will pause. However, it will either be very shallow and not allow a comfortable entry or will be the beginning of the longer trading range setting in that frustrate bull and bear alike, but the bulls will have all those fat profits to sit on.

 

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