Equities were seemingly caught off balance with the Fed’s ‘surprise hawkish shift’. From mine – there was very little surprising about it – you only needed to look at the data. However, what I was more interested in was how Powell would explain why they were cutting rates. As it turns out he struggled – leading to a small sell off in stocks. The irony was Powell did a better job of explaining why rates should not be lowered (which is obviously at odds with their decision to cut).
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Inflation x Rates = Uncertainty
The stock market could not be more optimistic. And perhaps not since the dot.com bubble of 1999 – have investors been so sure of the future. Excited by a business friendly government coming to power; lower inflation; consumers continuing to spend – what’s not to like? I can think of one thing…. valuations. If buying stocks today – you’re paying through the nose. And for me – that increases your risk.
Consumer Resilience to be Tested
The post-pandemic resilience of the American consumer continues to show strength. October’s retail sales data indicates continued spending, especially as the holiday season approaches. This is important, as consumption comprises 70% of all U.S. GDP. Overall US retail sales rose by 0.4% from the previous month, seasonally adjusted, and increased 2.8% year-over-year unadjusted. Good news. However, the question for today is what (if any) will policy changes impact spending behavior? For example, what could be the impact of tariffs? What if we see less government handouts? How will that impact lower-income households?
Fed’s Task in Changing Times
How aggressive can the Fed be in the coming months? The economic data doesn’t suggest a material slowdown – surprising to the upside in most cases. Therefore, are markets pricing in too many rate cuts? Maybe… longer-term yields are rallying post rate cuts. What’s this mean?
For a full list of posts from 2017…