The labor market has continued to strengthen, and economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has remained low. Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier in the year.

-Jerome ‘Jay’ Powell

Yes. In the garden, growth has it seasons. First comes spring and summer, but then we have fall and winter. And then we get spring and summer again.

-Chance the Gardner

Jay Powell did his best ‘Chance the Gardner’ routine while thumbing his nose at Wall Street, the President of the United States, and numerous economic trends. There is no doubt that large swathes of the economy are strong. However, they are strong without triggering inflation, which is a trick the Fed should relish rather than destroy. 

Not only are there record job openings, but there’s also room for more employment (see U6 numbers). The fact is that ‘job quits’ are ebbing and nowhere near levels that suggest massive disjointed wage increases. Sure, Americans are earning more, but there isn’t too much money chasing too few goods.  Still, Powell is going to paint by the numbers with policy, not unlike the way Chance approached his job in the garden.

Powell is more impressed with this economy than President Trump, and he doesn’t see any slowdown in jobs, inflation, or the musical hit streak of DJ Khaled. The thing is that the Fed wants, and to a large degree, all the credit for the miraculous rebound during the Obama years, but it’s maddening to think they will destroy it now.

I really would love to understand what’s driving these people. 

The Fed was a promise to the American public to ensure that there’d be no more vicious economic cycles and no more Panics. Someone thought the word Panic was so insidious for the market from the trial of broken investors in the 1880s; they decided to call them depressions in the 1900s. That didn’t work out so well.

Wall Street Wailing

While Powell was too defiant yesterday, let’s be honest about Wall Street’s reaction. This script has been played so often that we should all know it by heart. It beat down the market into the Federal Open Market Committee (FOMC) with a big up day into the final decision, hinting that Wall Street will reward the Fed for doing the right thing. And then, selling off in the ultimate temper tantrum.

The Fed has officially moved to two hikes from three earlier in the year. Many mavens saw as many as four hikes in 2018. 

Yes, I think it’s a huge mistake for the Fed to be on autopilot without considering the new dynamics of the economy in the age of Amazon and the Internet. Old-school inflation will never return, so the same battle plans eventually mean disaster for the economy.  I’m not sure what happens over the next few days.

I think the market is way oversold, but so what?  In panic mode, selling begets selling, and great stocks are sold to cover not-so-great stocks. 

Game Plan

It’s so weird watching this happen again. The Federal Reserve, which printed $4.5 trillion dollars to save the economy, is now ready to trigger another recession. Let’s see how today shakes out. I think the session after the conclusion of the FOMC is more important than the more emotionally-driven hours after the announcement.

For now, I will leave this quote with both the Federal Reserve and Wall Street:

We only know what we know until someone knows better.

-Chance The Rapper

Parameters

Yesterday, the Dow finished two points off the low and 740 points off the high of the session. It’s held here before, but the charts have been largely irrelevant. Of course, when the market regains its footing at some point, maybe a year from now, technicians will look back and show us just how easy it was to see the bottom. Living it is the hard part. Keep your wits about you.

If the market breaks down from here, we may suggest subscribers to raise a little more cash. By the same token, there are so many great oversold stocks right now. If we can wait out the panic phase, there could be huge percentage gains. 

There is no sense of urgency until there is a sense of urgency.

Communication Services	Consumer Discretionary	Consumer Staples	Energy	Financials	Health Care
2	2	1	1	1	1
Industrials	Materials	Real Estate	Technology	Utilities	Cash
3	4	0	1	0	4

Note: I’m still on holiday. We’re off to the Eternal City from today but will check in a couple of times. 

Ciao

Today’s Session

Futures have been oscillating between plus and minus in the pre-market.  With the holidays quickly approaching, liquidity will dry up the closer we get to the weekend. 

• Crude oil is following the equity markets lower, trading down $1.66, 3.45%, @ $46.51
• The U.S. Dollar is trading lower by 0.7%
• The 10-year Treasury yield is down 2 bps @ 2.75%

Overseas Action

• Japan: Nikkei -2.8%
• Australia ASX: -1.3%
• China Shanghai: -0.5%
• Germany DAX: -1.15%
• UK FTSE 100: -0.3
• Sweden OMX: -1.5%*

*Sweden’s Riksbank raised interest rates 25 bps to -0.25%, first rate hike since 2011.

On the economic front, the Philadelphia Fed Factory Index came in at 9.4 compared to a prior reading of 12.9.  Initial jobless claims rose 8k to 214,000, while the four-week moving average fell 2,750 to 222,000.  We will have more in the Afternoon Note.

Walgreens Boots Alliance (WBA) beat on top and bottom line and announced a collaboration with Verily, an Alphabet (GOOG) company.  WBA reaffirmed its guidance and detailed a cost management program.  WBA is trading lower by 1.76% in pre-market trading.  

Furniture maker Herman Miller (MLHR) beat on both the top and bottom line and increased its earnings guidance for the current quarter.  MLHR may be benefiting from the tariff war, due to a lack of competition from cheap imports.  MLHR is trading higher by 6.8% in pre-market trading.  

Speaking of tariffs, according to Reuters, China confirmed more trade talks will take place in January.

 

 

 

                                                  

 

 

Comments

The Workforce Participation Rate still isn't appreciably budging so I don't foresee too many of those 7.1 million available job openings getting filled. Brian Bigelow on 12/20/2018 10:02:02 AM

Hi Charles, Great commentary, as usual. This will be the n-th time in my lifetime that the Feds have tanked the economy. We should not be suppressed that they appear to be on autopilot – that is a ruse. The Fed’s double-speak, non-speak, misdirection speak, etc., just cover up the fact that bankers just want to make money – the so-called US Economy is clearly secondary. We should have non-bankers on the Fed board. Bankers make money by the use of “interest rates”, called usury in the Bible. I feel that interest rates are a key part of inflation – after all, it is the cost of money, and in some sense sets the floor of inflation. All other things being equal – but, of course they never are – the complexity of the Economy adds cover to the Fed insisting that higher rates will slow down inflation – sure, at the cost of killing the Economy “Carter enacted an austerity program by executive order, justifying these measures by observing that inflation had reached a "crisis stage"; both inflation and short-term interest rates reached 18 percent in February and March 1980.” Presidency of Jimmy Carter – Wikipedia; https://en.wikipedia.org/wiki/Presidency_of_Jimmy_Carter El Zorro Oro (The Gold Fox) Gary Fox on 12/20/2018 11:48:10 AM

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