Dave Moenning

The Fed’s On A Mission – Will It Be Different This Time?

To be sure, there are those that remain concerned about the state of the U.S. economy. The glass-is-at-least-half-empty crowd used last week’s weaker-than expected Non-farm Payrolls report as Exhibit A in their argument. And while the more upbeat economic crowd cites the timing of data collection and various other “technical issues” with the jobs report, yesterday’s JOLTS report presented a very strong rebuttal.

You see, the Labor Department reported Tuesday that Job Openings in the United States came in well above consensus expectations and hit a new high in the process.


Source: Wall Street Journal

And with the nation’s Unemployment Rate moving to a new low for the cycle and below the level deemed as “full employment,” Janet Yellen’s merry band of central bankers agree that the economy – as measured by the jobs market – is in pretty darn good shape right now.

Given that the Fed only has two official tasks (full employment and stable inflation), this means that the odds of Yellen & Co raising rates at the conclusion of next week’s FOMC meeting currently stand at about 100%. And no, this is not news.

Don’t Fight the Fed?

From a macro perspective, it is important to note that the Fed has clearly embarked on a tightening cycle. And since these cycles have historically resulted in recessions, this is a primary reason why many of my big-picture stock market models are waving yellow flags here.

One of the oldest clichés on the street is, “Don’t fight the Fed.” The reason this sentiment has become revered over the years is simple. The Fed usually gets what it wants and it controls the money.

In fact, of the sixteen tightening cycles seen in the last 103 years, thirteen have resulted in recessions. ‘Nuf said.

Different This Time?

The question, of course, is will this time be different?

The bullish argument is that yes, this time is indeed different. This time, the Fed isn’t trying to slow the economy or fight inflation. No, this time around, Yellen’s bunch is simply trying to return rates to more normalized levels after a protracted period of extreme accommodation.

Both Ben Bernanke and Janet Yellen have gone out of their way to communicate their “normalization plan” to the markets. They have tried to make it clear (as in “crystal”) that the Fed is NOT embarking on a traditional tightening campaign, rather the Fed is merely trying to get things back to normal.

From a stock market perspective, traders seem to be onboard with the plan. The thinking is that this time around, the rate hike campaign is actually a good thing because it means the economy no longer needs the monetary life support that has been provided by the Fed for the past nine years.

What Could Go Wrong?

Unfortunately though, the bottom line is the Fed has a history of “overshooting” with their rate campaigns. Remember, 81% of the time, the Fed’s rate hikes have produced recessions. And with the current economic rebound being the weakest on record in the post-war era, the fear is it wouldn’t take much to squash the economy’s current upward momentum.

So, despite the improving economy and good earnings, this is one of the reasons that my trusted, big-picture market models are not in their “happy places” at this time.

Could it be different here? You bet. The monetary warnings can certainly be “esplained” away this time around. As such, my model warnings may look silly in hindsight.

But one thing I have learned in my 30+ years of managing other people’s money is that ignoring risk factors such as monetary conditions and valuations is a great way to be “surprised” when bull markets morph into bears. While, my current cautious stance may turn out to be unwarranted, I prefer to stay in tune with the overall environment. And at this point in time, this means it is time to turn off the turbo chargers in your portfolios and to take your foot off the gas a bit – just in case there is an unexpected curve in the road ahead.

Thought For The Day:

Remember, no one plans to fail…

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. The State of the U.S. Economy

      2. The State of Earning Growth

      3. The State of Trump Administration Policies

Wishing you green screens and all the best for a great day,

David D. Moenning
Chief Investment Officer
Sowell Management Services

Disclosure: At the time of publication, Mr. Moenning and/or Sowell Management Services held long positions in the following securities mentioned: none. Note that positions may change at any time.

Looking for a “Modern” approach to Asset Allocation and Portfolio Design?

Looking for More on the State of the Markets?


Disclosures

The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

David D. Moenning is an investment adviser representative of Sowell Management Services, a registered investment advisor. For a complete description of investment risks, fees and services, review the firm brochure (ADV Part 2) which is available by contacting Sowell. Sowell is not registered as a broker-dealer.

Employees and affiliates of Sowell may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Positions may change at any time.

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

Advisory services are offered through Sowell Management Services.

Dave Moenning

My Take: Fed Will Stay The Course

Although nobody in the game expected Janet Yellen to make any moves regarding rates yesterday and the changes to the Fed’s post-announcement statement required a microscope to identify, this week’s meeting of the FOMC was important nonetheless.

After spending nine years pulling rabbits out their hats in order to keep the economy out of the deflationary ditch, you can bet your bottom dollar that Yellen’s merry band of central bankers would like to return interest rates back to more normal levels. And in case you’ve been living in a cave for the last couple years, you know that the Fed has begun the process known as “policy normalization.”

The problem is that in each of the last two years, Yellen & Co. have been forced to put the brakes on their plans due to what the WSJ called “economic shocks, especially from abroad.” As such, the Yellen has only managed to push out two rate hikes of 0.25% each so far.

While Fed members appear to be bent on raising rates at least three times in 2017, the markets are less than convinced at this stage. For example, according to Ned Davis Research, the Fed Funds Futures are projecting just 1.5 additional rate hikes in 2017. The issue at hand appears to be the lack of strength in the “hard” economic data. And Exhibit A in the argument is that the Fed may have to once again shelve their normalization plans, was the underwhelming Q1 GDP report (which sported a rather anemic annualized growth rate of just 0.7%).

Showing Some Resolve

However, at least at this stage of the game, Yellen’s gang appears undeterred as yesterday’s postmeeting statement remained surprisingly upbeat. In fact, the FOMC statement suggested that the weakness seen in the January-to-March period was “likely to be transitory.”

Perhaps this is due to the plethora of strong “soft” economic reports seen so far this year. Perhaps Yellen is standing behind the inflation data, which has reached the Fed’s target zone. Or perhaps the Fed is looking to boost its reputation by sticking to its guns here. But the bottom line is that yesterday’s statement signaled that Janet Yellen is assuming a “steady as she goes” stance with regard to the path of monetary policy.

Reasons To Stay the Course

First up on our list of reasons why Janet Yellen is likely to stay the course for three rates hikes in 2017 AND the start of a campaign to reduce the size of the Fed’s balance sheet by the end of the year is the fact that wage pressures are building.

Most folks think that commodities such as oil and grains are the primary drivers of inflation. But in reality, my work shows that wages are the key driver of CPI. And don’t look now fans, but wage pressures are starting to increase.

For example, the Atlanta Fed’s Wage Growth Tracker moved up smartly in 2016. And then after a drop into the election (likely due to uncertainty over the outcome of the vote) the wage growth tracker is now moving higher again. This has helped push the Employment Cost Index up 2.4% on a year-over-year comparison basis, which is near the upper end of the recent range, as well as the trends of other compensation surveys.

Next up is inflation. The bottom line here is the PCE (the Fed’s preferred inflation measure), which looks to have stabalized around the FOMC’s annualized target of 2%.

Then there is the fact that the stock market is near all-time highs. The first point here is the Fed has publicly voiced its concern about valuations in the stock market. So, if the market were to freak out over higher rates, Yellen has cover to say, “I told you so.” In addition, although the FOMC has been talking about raising rates AND starting to reduce their over $4 Trillion holdings, the stock market is none the worse for wear. Thus, the Fed appears to have a green light to proceed from the stock market.

Finally, and while I will admit this is pretty geeky stuff, the “real Fed Funds rate” (which adjusts for inflation), is currently LOWER than it was when the Fed started raising rates. Therefore, one can argue that the Fed is currently “more accommodative” that it was when the Fed Funds rates was back at 0%.

The Takeaway

So, while the “hard” economic data has been soft and Yellen’s bunch has backed off plans to raise rates due to economic softness in each of the last two years, for now at least, it appears that the Fed has backing to stay the course in terms of normalizing monetary policy. And from my perch, this is a good thing from a big-picture perspective.

Thought For The Day:

Learn to trust in an idea whose time has come…

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. The State of Trump Administration Policies

      2. The State of the U.S. Economy

      3. The State of Earning Season

      4. The State of World Politics

Wishing you green screens and all the best for a great day,

David D. Moenning
Chief Investment Officer
Sowell Management Services

Disclosure: At the time of publication, Mr. Moenning and/or Sowell Management Services held long positions in the following securities mentioned: none. Note that positions may change at any time.

Looking for a “Modern” approach to Asset Allocation and Portfolio Design?

Looking for More on the State of the Markets?


Disclosures

The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

David D. Moenning is an investment adviser representative of Sowell Management Services, a registered investment advisor. For a complete description of investment risks, fees and services, review the firm brochure (ADV Part 2) which is available by contacting Sowell. Sowell is not registered as a broker-dealer.

Employees and affiliates of Sowell may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Positions may change at any time.

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

Advisory services are offered through Sowell Management Services.