While the jury is still out about the new-look of the Federal Reserve, investors got a glimpse of how the body sees economic developments over the next few years.

The release of its semi-annual Summary of Economic Projections to the U.S. Congress, ahead of Chairman Powell’s testimony to both the House and Senate last week was surprising.  I dare say it was Goldilocks-like.

The Fed has sharpened its pencil and is reacting to obvious trends and momentum in the economy. The Fed also sees a much stronger Gross Domestic Product (GDP) growth and lower unemployment than it did back in September, but its core Personal Consumption Expenditures Price index (PCE) remains unchanged.

To be sure this doesn’t change, the fact is there will be at least three interest rate hikes this year. However, it’s hard to see why there would be four unless the economy really zooms, and, in that case, additional hikes would be warranted.

Economic Projections  Federal Reserve	2018	2019	2020
GDP Growth	2.5%	2.5%	2.0%
Sept Estimate	2.1%	2.0%	1.8%
Unemployment Rate	3.9%	3.9%	4.0%
Sept Estimate	4.1%	4.1%	4.2%
PCE	1.9%	2.0%	2.0%
Sept Estimate	1.9%	2.0%	2.0%
Core PCE	1.9%	2.0%	2.0%
Sept Estimate	1.9%	2.0%	2.0%

 

As for the Powell Fed, I will say this week’s testimony to the House and Senate will be a circus of partisan questions and pushing and pulling of the Fed chairman to endorse legislative policies and ideas.  I think there is a chance, however, for Powell to echo the conclusion of the advanced economic update to Congress, which means the market could take off like a rocket.

Warren Buffett’s “Margaritaville”

I’m not a big Warren Buffett fan when it comes to politics. In fact, I think he could have been more enthusiastic about Berkshire Hathaway’s $29 billion tax cut windfall, but his annual letter is a must-read; there are a couple of points every investor should take to heart:

Investing Isn’t a game of Monopoly

Charlie and I view the marketable common stocks that Berkshire owns as interests in businesses, not as ticker symbols to be bought or sold based on their “chart” patterns, the “target” prices of analysts or the opinions of media pundits. Instead, we simply believe that if the businesses of the investees are successful (as we believe most will be) our investments will be successful as well. Sometimes the payoffs to us will be modest; occasionally the cash register will ring loudly. And sometimes I will make expensive mistakes. Overall – and over time – we should get decent results. In America, equity investors have the wind at their back.

Berkshire Hathaway Annual Letter

I also think there are so many things wrong with the way the media and even Wall Street discusses investing and measuring success.  I don’t like using the calendar year as a magic line (where we start over like collecting $200) and going back to “Go.”  And while there is value in charts, it’s nuts that long- term investors would only rely on patterns rather than fundamentals. 

Share price targets only point to the potential at the time an opinion is written. The underlying factors will change day to day, which makes those targets irrelevant.  I’ll keep using targets because investors can’t seem to move off the mark without them, but it’s all about monitoring and measuring macro and micro factors, and how management navigates them to advantage the company and its shareholders.

Smartest Guys in the Room?

In 2007, Warren Buffett made a ten-year “bet” that he could do a lot better eschewing big-time hedge funds with their extraordinarily high fees (20% of profits and 2% administrative fees), and just investing in the market (S&P 500).

As it turns out, he was right.  Over that period, the S&P 500 climbed 125.8%, while the best fund increased 87.7%, and the worst only 2.8%.  These are the smartest guys in the room, the Pharaohs of Wall Street.

Fund A	Fund B	Fund C	Fund D	Fund E	S&P 500
21.7%	42.3%	87.7%	2.8%	27.0%	125.8%

 

I think do-it-yourself investors need help like the kind we provide, but they should be engaged and never just fork over hard-earned cash to be scattered in a bunch of funds that probably will underperform.

Message of the Market

Investors are still digesting what all the sound and fury of the stock market and whirlwind gyrations means for their investments.

Periods of wild volatility after such a long period of calm is natural and warranted.  It’s uncomfortable, but it serves multiple purposes, including providing the argument and foundation for the resumption of the rally.  We might be there judging by Friday’s session.

The late spurt not only was positive because it happened on a Friday, but major indices also took out key technical resistance points as well.   Then there’s the shift in market breadth as new highs continue to edge out new lows. 

NYSE:

• 2,430 advancers
• 549 decliners
• 2.5 billion Up volume
• 500 million down volume

NASDAQ:

• 2,164 advancers
• 765 decliners
• 1.5 billion Up volume
• 359 million down volume

Each S&P sector rallied higher with utilities leading the pact, perhaps underscoring cautious optimism. Still, key resistance points were taken out on a Friday rally that surged into the close.

Consumer Discretionary (XLY)	+1.40%
Consumer Staples (XLP)	+0.97%
Energy (XLE)	+2.17%
Financials (XLF)	+1.50%
Health Care (XLV)	+1.60%
Industrials (XLI)	+0.83%
Materials (XLB)	+1.47%
Real Estate (XLRE)	+1.82%
Technology (XLK)	+2.09%
Utilities (XLU)	+2.61%

Today’s Session

Major indices are poised to open higher, although off the highest pre-opening levels. There is no particular news this morning, but that calm cool of would-be buyers could be yielding to a notion the train could be moving out of the station, and they are missing it…again.

A handful of names are leading the charge, which is spearheaded by Amazon. 

Metals act great as President Trump continues to pound the table on harsh actions to curb unfair trading, including tariffs on industrial metals and ripping up NAFTA. 

 

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