Sell In May? Wait For The Powell Put

After turning in one of its best January-April performances in more than 20 years, the stock market has suddenly run out of gas in May. We’re nowhere near correction territory – the S&P 500 is down about 2% so far this month after climbing more than 18% in the first four months of the year, and up 22% since the Christmas Eve bottom. Yet the financial press has been filled with “sell in May and go away” stories, citing the Wall Street urban legend – or historical trend, take your pick – that all the money that’s going to be made this year has already been made, so you may as well cash in your winnings and sit out the rest of the year.

The major impetus behind the dip – which doesn’t even meet the definition of a “dip” yet since few people seem to be buying on it – is President Trump’s announcement that he has upped the ante on the trade war with China, raising worries that talks between the two countries will collapse. The recent spate of high-profile IPOs from Lyft, Uber, Pinterest and other companies is also signaling that the stock market may have peaked.

Which raises the question: Is the Powell Put going to come to the stock market’s rescue again in the near future? How deep will a drop in the stock market – assuming it keeps dropping – have to get before the Federal Reserve intervenes and cuts the federal funds rate? Continue reading "Sell In May? Wait For The Powell Put"

Can't Get No Satisfaction

President Trump has already won his argument for loosening Federal Reserve policy. While Fed Chair Jerome Powell can boast all he wants about the sanctity of the Fed’s independence, the fact is he and his FOMC followers knuckled under to the pressure Trump – and the financial markets – exerted on them to call a halt to any more interest rate increases for a while. Indeed, the discussion has since moved to cutting interest rates, a thought that seemed unimaginable just a few months ago.

Back in October, we were talking about how many rate increases we could expect this year. Now that any rate hikes are basically off the table for the foreseeable future, according to the Fed, the talk has shifted to a potential rate cut, possibly before the end of this year.

So why can’t Trump be satisfied with that? Instead, he’s sabotaging his chance to fill the two remaining seats on the Fed’s board of governors by publicly considering two people – Herman Cain and Stephen Moore – both of whom have way too much political baggage to hope to be confirmed, never mind actually nominated (remember, Cain was never formally nominated before he withdrew, nor has Moore).

While Fed independence is certainly a noble idea, the fact is that every person considered for the board has some political taint to them, expressed or not. Otherwise, they wouldn’t have been nominated in the first place. We all need to realize that and not try to pretend otherwise. Jerome Powell was nominated by Trump because he’s a Republican, while his predecessor, Janet Yellen, was nominated by President Obama because she’s a Democrat. Simple and reasonable. Continue reading "Can't Get No Satisfaction"

Easy Money vs. Free Money - Choose Your Poison

When I was in high school, one of my political science teachers explained to us that the political spectrum wasn’t so much a straight line – with the liberals on the left and the conservatives on the right – but was really shaped like a horseshoe, with the far left and the far right moving closer together at the outer fringes to the point where they almost meet. That the name-calling and the accusations – and the behavior – are most vehement at the outer edges doesn’t change the fact that the things they say they believe in are virtually indistinguishable from each other, only the labels are different.

President Trump’s plan to nominate Herman Cain and Stephen Moore to the Federal Reserve is a good example. These two men have undisputed conservative credentials and are also in sync with the president’s demand that the Fed adopt an easy money policy so as not to undermine U.S. economic and stock market gains. Not surprisingly, that makes them completely unacceptable to the left.
There’s been the obligatory hand-wringing and phony outrage by their opponents decrying that Trump “means to remake the 105-year-old agency into a partisan tool” (the Washington Post) and “trample over the Fed’s independence” (the Financial Times). We got the same blather when Trump nominated someone to the Supreme Court – which, we’ve been told, is completely independent and never, ever takes politics into consideration when it decides cases, and justices are never, ever chosen because of their perceived political views.

Already, even before they’ve been formally nominated by the White House, Trump’s opponents have started to dredge up all the dirty laundry they can about Cain – alleged sexual harassment eight years ago – and Moore – all the juicy details about his divorce. Whether or not those past sins will be enough to torpedo their nominations remains to be seen. But it’s likely their personal peccadillos – not their actual monetary and economic philosophies – will be the main focus of their nomination hearings, should they even get that far. Continue reading "Easy Money vs. Free Money - Choose Your Poison"

Sweet Surrender

Janet Yellen had a pretty easy job when she was the Federal Reserve chair. By keeping interest rates at or near zero for years on end, she never heard any criticism from the president, government officials or the financial markets. Since he became Fed chair a little over a year ago, Jerome Powell has gotten nothing but flack, from President Trump – who was at it again last week – to a whole swarm of people on Wall Street complaining that the Fed was ruining their returns.

Powell got the message several months ago, and last week he handed in his formal surrender. Not only did the Fed leave interest rates alone at its monetary policy meeting, but it indicated that there would likely be no more rate hikes the rest of this year, and maybe next year, too. “It may be some time before the outlook for jobs and inflation calls clearly for a change in policy,” Powell said.

The Fed also called a halt to the runoff in its still humungous Treasury securities portfolio. Beginning in May, the Fed will slow to $15 billion – from the current $30 billion -- the monthly redemptions of its Treasury holdings, with the runoff to end in October, meaning its balance sheet will start growing again.

So now Powell and his Fed mates can sit back blissfully and listen to the silence, at least for now. Continue reading "Sweet Surrender"

Yield Curves, 2-Year Yield, SPX (and a crack up boom?)

While the 30-5 year yield curve does this, implying some inflationary issues…

30yr yield minus 5yr yield

The more commonly watched 10-2 year does this, implying ongoing Goldilocks…

yield curve

While the nominal 2-year yield does this, implying “ruh roh!”Continue reading "Yield Curves, 2-Year Yield, SPX (and a crack up boom?)"