The market finished higher yesterday, but the elephant’s presence in the room held back stocks, resulting in slim gains for the major indices. And an anvil fell on Material stocks (XLB), which have been major stealth winners.

Market breadth saw decliners significantly higher than advancers.

Market breadth saw decliners significantly higher than advancers.

Market Breadth	NYSE	NASDAQ
Advancers	1,077	1,545
Decliners	1,980	3,007
New Highs	87	93
New Lows	23	93
Up Volume	1.37 billion	2.21 billion
Down Volume	2.60 billion	2.75 billion

Heat Map

Enough mega-cap names held to keep the market higher, but lots redder internally.

Divergence

What’s intriguing is small-caps are lurching into freefall even as the NASDAQ-100 (NDX) holds higher. I’m unsure what’s happening, although some are chalking this up to the “January Effect” running its course.

Jay Powell Goes to Washington, D.C.

The markets have already priced in Fed funds moving to 5.75%, so Powell making it official may not be news, but it remains to be seen how tough he talks with respect to curbing inflation.

There are signs the Fed and Wall Streets’ economists are getting this all wrong. We get the official stuff this week. But the Fed has to know there are serious signs the economy is slowing down enough not to be pushed over a cliff.

The system is invested in the system, including all the flawed data. So, while those 400 PhDs at the Fed know there is more to the economy than weak surveys, those surveys are part of the package.

I will be more interested in how Powell answers questions about the Fed’s ability to recognize when they have gone too far and mitigate a deep recession.

Powell has previously suggested it would be as easy as flipping a switch.

Portfolio Approach

There are no sector weighting changes today to our Hotline Model Portfolio.

Today’s Session

As we await Jay Powell’s testimony, we should not miss how this all came about.  In 1978, Congress kicked its job to provide jobs to the Federal Reserve.

The Employment Act of 1946 was designed to help returning soldiers find work, but the process veered away from free markets, including an original version that proclaimed citizens have a ‘right’ to a job.

Humphrey Hawkins is also a left-leaning act but acknowledged the role of private enterprise.

The Humphrey Hawkins Act was passed to provide instructions to the government on using spending, job creation, and monetary policy to avoid economic downturns, such as the one suffered during the Great Depression. The idea was that the Government could boost of economic demand by selective spending in cooperation with private industry. The Acts objectives rest in Keynesian theory. Keynes asserted the Governments can augment demand and can minimize shocks in the financial system through selective spending. The Humphrey Hawkins Act called provided the Government with authority to reduce employment by creating temporary government jobs. It also, expanded Congress ability to control aspects of monetary policy - which is traditionally reserved to the Federal Reserve Board. The Act laid out 4 goals:

1. Full Employment
2. Growth in Production
3. Price Stability
4. Balance of Trade and Budget

The Act further adds that, in achieving these goals, the Government should:

• Allow private enterprise to lead the way in achieving these goals;
• Attempt to balance the budget;
• Attempt to have balanced trade;

Mandate the Federal Reserve Board of Governors to purse monetary policy that produces long-run growth, minimizes inflation, and promotes stability.

Mandate the Federal Reserve Board of Governors provide a Report on Monetary Policy to Congress two times per year;

Mandate the President set numerous goals for the economy and policies to achieve them within the President’s Economic Report each year.

Mandate the Chairman of the Federal Reserve to align monetary policy with the economic policies put out by the President.

The Government was authorized to create a pool for public employment in the low-income, low-skill areas sufficient to raise economic demand.

Interestingly, the Act put in place economic targets that were to be achieved by specific years. The Act allowed Congress to revisit and amend those goals. In reality, very few or none of those goals were achieved within the stated time period.

Powell begins speaking at 10am.

 

Comments

I wish Powell would tell the congress that he doesn't want to raise interest rates but their irresponsible spending leaves him no choice. If they would ease off the gas pedal, he wouldn't have to ride the brakes. I wish he had the nerve. neil bradie on 3/7/2023 11:35:40 AM

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