Wednesday, December 19, 2018

Fed Blues

Well, so much for odds favoring a sustainable rally this morning.

On the announcement of a .25% rate hike and potentially 2, instead of 3 or 4, hikes next year the Dow shot from around 300 points higher to nearly 400 points higher.

As the statement was digested, however, the rally quickly evaporated. For a brief stretch thereafter the market turned around, trading nicely higher leading into Chairman Powel’s press conference, where he proceeded to literally tank it with his commentary. The sharp selloff began when he suggested that the Fed has no plans to curtail its current $50 billion a month rolloff of its balance sheet.

His commentary in essence supported our view of the global macro environment being still relatively strong, but with the rate of growth moderating versus what we expected at the beginning of this year. He also made it clear that policy will adjust as their forecast changes. Pragmatically speaking, that’s exactly what thoughtful long-term investors should want.

As of this moment, however, thoughtful investors are clearly not in charge of short-term market reactions. But rather, the market is at the mercy of traders -- and their algorithms -- responding instantaneously to literally words and phrases that trigger their buy and sell responses. A condition that will ultimately burn itself out as reality settles in and other global macro issues come to their respective heads.

Bottom line, for investors, per the Fed’s commentary today, present general conditions (always subject to change) remain supportive of economic growth, and, thus, an ultimate continuation of the bull market -- despite the present bout of extreme volatility.

As for event risk, stepping back from the noise, on balance we should view today as slightly net positive. Earlier in the year, when the trade war, for example, was heating up, the Fed remained very much on it's strong monetary tightening path. As we sit here today, we have tremendous incentive for the U.S. and China to come to mutually acceptable terms, while, per this morning's message, we also have a somewhat more accommodative Fed than we had just a few months ago...  We'll keep you posted...

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