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Morning Commentary

Wall Street Salutes Midterms

By Charles Payne, CEO & Principal Analyst
11/8/2018 9:08 AM
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Question of the Week

According to a report from JP Morgan released on October 5, Chairman of the Federal Reserve, Jerome "Jay" Powell, had cost $1.5 trillion losses in market cap since taking over in February. That number is certainly a lot higher and has maybe doubled since then.

Do you think Jay Powell will curb his approach or will he destroy the stock market even further?


Post your answer below.

Don’t look now, but all the major indices are higher and regaining momentum as we head into the remainder of the year.

Market Breadth

There were more 52-week highs than 52-week lows on the NYSE.

NYSE

NASDAQ

The Message of the Market

It was a monster session that gained strength throughout the day on Wednesday, sending several messages. I’m reluctant to use the word “gridlock” because that’s not necessarily what might happen. Pundits point to periods of strong markets and economies during a split government in the past, but they miss the fact that things got done.

President Reagan got along with Tip O’Neill and tweaked his approach, including seven tax hikes.

President Clinton worked with Newt Gingrich and pivoted in the middle.

It is hard to believe President Trump and Nancy Pelosi will develop a warm relationship even though they made nice yesterday. Nonetheless, the fact is, they don’t have to be best friends to get things done, and maybe the market senses that will be the case.

I’m just very reluctant to regurgitate the usual talking points spoken by folks that keep missing the rally and keep talking about things that simply aren’t a factor in the market. The crowd is so off-base now, blinded by personal animosity rather than focusing on the true message of the market.

The market didn’t explode because of spontaneous combustion. It rocketed higher because the economic agenda and building plans in the pipeline will continue. Meanwhile, President Trump’s trade hand got stronger with those giant wins in the heartland and key Democratic support.

The rally couldn’t be derailed by a hostile press conference, or news of the long-rumored departure of Attorney General Jeff Sessions coming to fruition. The pent-up demand to be in this market simply broke the dam of anxiety and fear that built during the October sell-off.

Buyers moved into all sectors with a mix of chasing old favorites such as Amazon (AMZN), +6.9%.  And speaking of former U.S. Attorney General Sessions, marijuana stocks cheered his departure:

S&P 500 Index

+2.12%

Communication Services (XLC)

+1.83%

Consumer Discretionary (XLY)

+2.72%

Consumer Staples (XLP)

+0.57%

Energy (XLE)

+1.61%

Financials (XLF)

+1.30%

Health Care (XLV)

+2.94%

Industrials (XLI)

+1.62%

Materials (XLB)

+1.80%

Real Estate (XLRE)

+1.10%

Technology (XLK)

+2.92%

Utilities (XLU)

+1.14%

 

There is a constant that has carried over from October, and it’s the hell stocks pay for the slightest miscue with earnings or guidance -instant carnage. It’s impossible for long-term investors to avoid some of these each quarter, and investors must dig in with those names that continue to have an attractive value proposition.

Bonds & Fed

Don’t look now, but the 10-year Treasury is nearing its 2018 high. This makes yesterday’s session even more impressive, as the two toughest periods in the market this year revolved around spiking yields and concerns about the Fed.

Yesterday, the Federal Open Market Committee (FOMC) wrapped up its two-day meeting. While the consensus shows there will be no action on rates, I’m hoping we will get clarity on how far rates might go to achieve the objective of Powell & Co.

#AskPayne?

@Martin C Brhel Jr

Can U explain to your viewers what a "margin call" is? TY!

This is a great question because many believe this is a huge problem in the market.

According to the Financial Industry Regulatory Authority (FINRA), buying on margin is getting a loan from your firm to buy securities. When you buy securities on margin, you must repay both the amount you borrowed and interest, even if you lose money on your investment.

Margin Call

If the equity in your account falls below the maintenance margin requirements, your firm can sell the securities in your accounts to cover the margin deficiency.

In January, the FINRA warned about the record level of margin debt outstanding, but more importantly, how quickly it was growing to $100 billion in one year. That warning spooked the margin, and margin debt has been lower since.

The most important thing to understand is when bad investments go lower, the margin call means the brokerage firm will sell your winners. 

When this happens to you, it’s probably happening to a lot of other people as well, and it’s another reason why during major selloffs even great stocks get hit, too. 

It’s an interesting paradox that one mistake of picking bad stocks wipes out the otherwise good fortune of picking good stocks.  This is just part of the cautionary tale of borrowing to buy stocks.  

Click here to get additional #AskPayne questions

Today’s Session

There’s a lot going on nudging the needle this morning, but more than likely, the market will react mostly to the Federal Reserve.  Sadly, the last FOMC gathering will end without a press conference.  I’m not sure how the Fed signals major changes, or even subtle ones, but investors need answers.

Series of Unfortunate Events

The Fed is taking out $50.0 billion in “accommodation” each month, and it’s beginning to impact banks and influence the economy and stock market.  Coupled with reckless comments, and I contend the Fed is the biggest threat to the economy and stock market – nothing else is without miles.

 


Comments
With Dems in charge of the house he will back off.

Rich on 11/8/2018 9:23:00 AM
Many conservatives say the "Deep State" will take down President Trump. I have thought that if Trump looses reelection, it will be because the Federal Reserve drives up interest rates in a manner that brings down the economy, President Trump's one indisputable achievement that has benefitted every American. If you want a conspiracy theory, that would be mine. The timing of the FED's October comments you cited above right before the election fit this theory nicely.
QUESTION: The Constitution empowers Congress to set the value of money and its printing, etc. In 1913, Congress created the Fed and delegated this power to it. Do you think it's time for Congress to take back this power and function? Pretty scary no matter how you answer that question!

Bill Wanamaker on 11/8/2018 10:14:11 AM
I think the leftist advocacy and bias of CNBC has created an issue AGAIN in an attempt to create news rather than report. When I read the article, it reaches that number by adding the presumed immediate effect of Powell’s speeches, totally ignoring the fact that each impact fades over days. Reality is that when Powell speaks he causes anxiety which fades until he speaks again and the SAME anxiety has the SAME short term impact. The impact is decidely NOT cummulative and the leftist “destroy the economy so Repulicans will look bad” reporting by a biesed press is fatally erred. Furthermore, even if Powell’s impact was cumulative and negative, it would only serve to make the market lower going into the next recession and therefore have a dampening effect on the depth of that recession which we all know will come eventually. If anything, I would be concerned that the net impact of his remarks would be too much optimism (which is what he is accused of) and which would cause the market to become more overheated and cause a more severe correction when it comes (rather than causing market capital loss now).

Bob G on 11/8/2018 10:34:54 AM
Get rid of the Fed. They will do whatever "their" data shows. Real world, and new facts on the ground not important to them. Government positions with no check on performance doesn't work.

Mitchell Schiff on 11/8/2018 4:17:38 PM
I agree get rid of the Fed. The economy was great. The fed The fed is just another part of the deep state.

Stan on 11/10/2018 1:35:07 AM
 

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