Last weekend Fed Chair Jay Powell gave a rare interview with TV program ’60 Minutes’. Not only did Powell tell people to expect rates to remain higher for longer – he also sent less than subtle warnings to Congress. I quote: “It’s probably time, or past time, to get back to an adult conversation among elected officials about getting the federal government back on a sustainable fiscal path”. Amen. But good luck with that Jay. When asked if this was an urgent problem – Powell said “You could say that it was urgent, yes.” In short, keep a close eye on bond yields – especially the long-end. The market wants them to head lower – much lower – however fiscal recklessness could prove otherwise.
Why Would the Fed Cut?
Last week the market received what it interpreted as a ‘goldilocks’ jobs number. Not too hot. Not too cold. But just right. Non-farm payrolls (NFP) increased by 199,000 in November, according to the BLS. This was around 19,000 higher than market expectations – however not hot enough for the Fed to raise rates this week. As an aside, the Government added 49K jobs as part of the 199K (inline with their monthly average). The unemployment rate, meanwhile, fell to 3.7% from 3.9%, marking the longest stretch of unemployment below 4% since the 1970s. That’s essentially a full employment picture. So here’s my question – why would the Fed consider cuts at full employment?
Investors Start Weighing the Risks
Investors have hit pause on equities – evaluating a new set of risks. For example, the S&P 500 is now trading close to the same level it was at the end of January. 8 months of gains gone! The world’s largest index is up ~10% year to date… losing 2.4% this week. When you consider the S&P 500 lost ~19% last year…. it has not been a good two years. This post looks at why the outlook has deteriorated with 4 key charts: (i) 10-year yield; (ii) 10-2 yield curve; (iii) VIX; and (iv) gold – which touched $2,000 this week. What does it all mean?
Bye Bye Sugar High
Are equities finally connecting the dots? Maybe. Whilst this has been a difficult market to trade – my sense was to approach with caution. From mine, there were too many open questions. For example, when the market was trading around 4600 – my sentiment was the downside risk outweighed any upside reward. We are now ~8% lower… closer to the zone of where I felt the S&P 500 could trade. In short, valuations were stretched. Put another way, the risk premium for owning stocks wasn’t there. But markets pushed higher – taunting the Fed on their “higher for longer” script.
For a full list of posts from 2017…