Weighing The Week Ahead: Will A More Aggressive Fed Kill The Stock Rally?

About: SPDR S&P 500 Trust ETF (SPY), QQQ, DIA, SH, IWM, TZA, SSO, TN

Summary

Economic data remain solid.

The Fed is signaling a more aggressive plan for rate hikes.

President Trump sounded some notes of compromise (important) but the policy agenda is still uncertain.

Markets have historically done fine during early stages of rate increases, especially when starting at a low level.

Key Question: Will the Fed raise rates even in a sluggish economy?

The economic calendar is light until the Friday employment report. Most of the punditry are still digesting the more aggressive talk in the recent speeches from Fed participants. With many observers expecting a correction and looking for a catalyst, pundits will be asking:

Will a more aggressive Fed derail the rally in stocks?

Personal Notes

I have a vacation coming in a couple of weeks. I will not write WTWA next weekend, and possibly not the weekend after that. I will still be following the markets and email. I will join in if it seems needed. The Stock Exchange group is supposed to keep working.

Last Week

Last week the news was mostly positive, and stocks responded again.

Theme Recap

In my last WTWA I predicted a discussion about whether stock prices had lost touch with reality. That was a good guess. There was plenty of talk about market valuation. Those bearish also questioned the lack of specifics in the Presidential Address to Congress – which had a greater immediate effect that the annual Buffett letter.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short via Jill Mislinski. She notes yet another record close based on the week’s gain of 0.67%. We can also see the gap opening after the Presidential Address to Congress.

The rally story is even clearer in this chart, when it begins before the election.

Doug has a special knack for pulling together all the relevant information. His charts save more than a thousand words! Read his entire post for several more charts providing long-term perspective, including the size and frequency of drawdowns.

The News

Each week I break down events into good and bad. Often there is an “ugly” and on rare occasion something very positive. My working definition of “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!

This week’s news was mostly positive.

The Good

• Durable goods orders increased 1.8% after last month’s decline. Most of the increase was from the volatile transportation sector, but it was still a welcome boost.
• Earnings news was positive. Brian Gilmartin emphasizes the favorable trend in estimate revisions. FactSet reports that the earnings and revenue beat rates are slightly lower, but outlook is stronger. Here is an interesting chart of surprises by sector.

• Investor sentiment turned more bearish. The AAII reports that sentiment is within historic ranges, but off recent highs. This is unusual given past behavior in a rising market. I score it as “good” since most regard it as a contrary indicator.
• Mortgage delinquency rate falls below 1%, the lowest since June, 2008. (Calculated Risk).
• ISM Non-Manufacturing rose to 57.6 (from 56.5). The employment index also moved higher. February was stronger than January.
• ISM manufacturing increased to 57.7 beating expectations and showing a solid increase over last month’s 56.1. The Chicago regional survey was also very strong.
• Rail traffic in February was 4.2% higher than a year ago. Steven Hansen takes the look at the data we have come to expect, including various moving averages and trends. Read the whole post, but this chart captures some key points, especially the improvement over the last two years.

• Consumer confidence spiked to 114.8, a post-recession high. Briefing.com covers this series.

• Initial jobless claims rose slightly on the week, but dropped to the lowest level since 1973 on the widely-followed four-week moving average. (Calculated Risk).
• President Trump’s speech was very well-received. Most preview articles mistakenly emphasized the need for specifics. Commentators right after the speech did the same. My own preview did not provide advice on what to go out and trade right after the speech. Instead, I drew upon experience and the current policy environment to highlight the key element – the potential for compromise. This chart shows the dramatic shift in this Trump presentation, more like SOTU speeches than nearly anything else he has done. (The Upshot)

The Bad

• Construction spending fell 1%.
• Money supply is drifting to the neutral range – possibly even tilting negative. (New Deal Democrat). Despite complaints about Fed policy, this is a possible economic drag.
• Pending home sales fell 2.8% and December was revised lower.
• Debt Limit will be reached in mid-March. Even the extraordinary efforts will be exhausted in September or October. Will this play out any better with a GOP President and Congress? Douglas A. McIntyre has a good story on this issue.

The Ugly

My concern about hacking and threats to the Internet’s weak spots continues. Rick Paulas’s article is not about events from last week, but is just as relevant. Perhaps even more so with the Barron’s cover story on robots.

The article explains that even rather unsophisticated attacks can work on the 6.4 billion Internet of Things devices in use. Little is being done to protect on this front.

The Silver Bullet

I occasionally give the Silver Bullet award to someone who takes up an unpopular or thankless cause, doing the real work to demonstrate the facts. No award this week. Nominations are welcome. Potential award winners can find daily inspiration at several websites!

The Week Ahead

We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react. That is the purpose of considering possible themes for the week ahead. You can make your own predictions in the comments.

Wall Street Breakfast: Snap IPO On The Horizon

Includes: ABX, AMAT, BA, CBS, CSCO, ETSY, FOX, FOXA, FXCOF, GRPN,

Snap Inc. sees its upcoming initial public offering priced at between $14 and $16 per share, according to new regulatory filings. That could value the owner of ephemeral messaging app Snapchat at $19.5B-$22.2B, near the low end of what the company had earlier targeted. The stock could get a final price as soon as March 1 and begin trading the following day on the NYSE under the ticker "SNAP."

Economy

Two days of testimony from a more hawkish Janet Yellen has cemented the idea that the U.S. central bank will raise interest rates by midyear if not sooner. Yellen also said she opposes an intrusion on the Fed's independence after House Financial Services Committee Chairman Jeb Hensarling announced a plan to include congressional audits of interest rate policy. "It would result in poor economic performance," she said during the hearing.

With his confirmation looking increasingly imperiled, Labor Secretary nominee Andy Puzder has taken his hat out of the cabinet ring. The CEO of CKE Restaurants was at the center of a swirl of controversies, complaints and potential conflicts. Reports also suggest President Trump has offered his vacant national security adviser post to Vice Adm. Robert Harward, a former Navy SEAL and deputy commander of U.S. Central Command.

President Trump hosted Israeli Prime Minister Benjamin Netanyahu at the White House yesterday, in their first talks since he took office. At a joint press conference, Trump asked Netanyahu to "hold back on settlements for a little bit," but stopped short of committing to a two-state solution, declaring his support for a peace agreement that both sides "like the best."

A three-week-old scandal may have cost conservative Francois Fillon his status as favorite to win the French presidency. The country's financial prosecutor announced today that a case involving €830K in taxpayers' money - brought against his wife for a "fake job" as her husband's parliamentary assistant - will remain open. The first round of the election is less than 10 weeks away.

Free trade deal resurrection? The European Parliament has approved a landmark global trade pact with Canada, backing the Comprehensive Economic and Trade Agreement by a vote of 408-254. Parts of the deal, such as tariff reduction, will come into force immediately, while more controversial aspects, such as the investor court system, will require ratification by EU member states.

Stocks

A South Korean judge questioned Samsung Group (OTC:SSNLF) leader Jay Y. Lee and another executive behind closed doors today to decide whether they should be arrested over their roles in a corruption scandal that has engulfed President Park Geun-hye. The same Seoul court rejected a request for a warrant in January, but a spokesman said it had since expanded the charges to include hiding the proceeds of a criminal act.

According to CNBC, Toshiba (OTCPK:TOSYY) may delay the sale of its prized flash-memory chip unit after the conglomerate said it would consider selling most, even all, of the marquee business. Loosening the deadline would ease concerns about trying to hurry any antitrust reviews, increasing the number of potential buyers and improved offers. Among the possible bidders: MU, WDC, OTC:FXCOF, OTC:HXSCF and Bain Capital.

Production workers at Boeing's South Carolina plant have overwhelmingly voted not to join the Machinists, maintaining southern reluctance toward unionization. It was a high-profile test for organized labor in the nation's most anti-union state. The plant will get additional attention this week as President Trump visits the facility on Friday to mark the completion of the first 787-10, Boeing's (NYSE:BA) newest version of the Dreamliner.

"In most states and cities, there are no rules about driverless cars," said UBER's Emil Michael, explaining why the company doesn't always know who's going to be welcoming until after it puts test vehicles on the road. "Relationships are hard sometimes, so you have to invest in a lot of them," he added, citing the need to find more "friendly cities" and get more "real road miles to make the thing work."

Organic growth of 3.2% for 2016 was at the high end of the industry, but "there is no beating around the bush - it came in lower than we expected," said Nestle's (OTCPK:NSRGY) new CEO Ulf Mark Schneider. It was the fourth straight year Nestle had missed its 5-6% growth objective, known as the "Nestle Model." As a result, the company is stepping up "restructuring" and cutting its sales growth target to 2-4% for 2017.

Kombucha drinkers (or brewers) rejoice! Colorado lawmakers have introduced the KOMBUCHA Act in Congress, which would increase the tax limit on drinks from 0.5% ABV to 1.25%, making it exempt from federal alcohol tax and regulation. The trendy fermented tea is a growing industry, with an economic impact of $600M expected to be worth $1.8B by 2020. Related tickers: PEP, HAIN, SBUX, WFM, OTC:PUSH

Twitter's jump into live events has largely been about sports, but Sunday night's Grammy Awards attracted more viewers than any NFL game. Some 5.1M people tuned into the event, a number topped only by the presidential election and Donald Trump's inauguration. Twitter (NYSE:TWTR) plans to double the amount of live programming it shows in 2017, as it attempts to boost engagement in a highly competitive online media world.

Shareholders of Time Warner have approved the company's $86B takeover by AT&T (NYSE:T). The OK came with 78% of outstanding shares in favor, and 99% of shares voted, but tough regulatory aprovals are seen ahead. The mega-merger would pair entertainment creators such as HBO, CNN and Warner Bros. (NYSE:TWX) with AT&T's wired and wireless networks and DirecTV.

Verizon's discount on its $4.8B deal to acquire Yahoo (NASDAQ:YHOO) may amount to as much as $300M, WSJ reports. It follows weeks of tense talks after a pair of massive data breaches were revealed by Yahoo, affecting 500M and 1B users respectively. If the revision is quickly agreed to, Verizon's (NYSE:VZ) deal could close in April - though an SEC probe into the breaches could still slow that timeline.

Fed Leaves Rates Unchanged, Ducks Criticism About Confusing Guidance

Three of the 10 voting members of the Fed's monetary policy committee wanted to raise the target range for short-term interest rates by a quarter of a point.

The Federal Reserve, as expected, didn't raise interest rates today -- but the central bank sent mixed messages about whether the economy is strengthening that sparked fresh criticism of a central bank increasingly seen as indecisive.

The action leaves the target range for the closely-watched Federal Funds Rate at 0.25% to 0.5%. But the language in the post-meeting statement issued by the Fed's Open Market Committee and the economic projections of the committee's members pointed in different directions.

The language suggested the economy is gaining steam, while the projections pointed to weaker medium-term growth and a slower upward path to rates than the Fed has seen as likely until now, while continuing to predict that the central bank will boost rates at least once this year, probably in December.

Committee members said that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives. In a notably more upbeat summation of the economy than the committee made in its July statement, the Fed said "the labor market has continued to strengthen and growth of economic activity has picked up from the modest pace seen in the first half of this year. Although the unemployment rate is little changed in recent months, job gains have been solid."

"We're generally pleased with how the U.S. economy is doing," Fed Chair Janet Yellen said at a news conference. But, she added, the recent jump in workforce participation and other measures indicate the economy still has enough slack that inflation isn't a major risk. "The economy has a little bit more room to run than we thought, which is good.''

Indeed, three of the 10 voting members of the committee wanted to raise the target range for short-term interest rates by a quarter of a point.

"I think they are laying the groundwork for a December rate hike, but after two disappointing prints on gross domestic product growth they want to wait and see if growth has actually recovered in the third quarter," said Brian Coulton, chief economist at Fitch Ratings. "The labor-market data seems less of a reason to wait now, but the recent weakness in non-oil business investment is likely giving them grounds to hold off a bit longer."

Economic projections released along with the statement show that the members of the committee reduced their median estimate of this year's growth in the economy to 1.8% from a projection of 2% in June, and trimmed their projections for how quickly rates will be likely to rise over the next two or more years.

The inaction, regardless of the members' seemingly growing support for a rate hike, didn't sit well with some economists.

 "If you want to consider this a 'hawkish hold,' knock yourself out, but saying the case for a rate hike has strengthened but opting to wait simply means there are now three more months for something to go wrong and fend off a December rate hike," Regions Financial Chief Economist Richard Moody said in an e-mail. "This statement doesn't do much for their credibility."

Brian Sozzi, a columnist for TheStreet's subscription-based premium site Real Money, added in his analysis of the Fed's move that the central bank is "talking out of both sides of its mouth. The market loves it, so why not ride out the bullishness for now?"

See full coverage of the Federal Reserve's monetary policy here.

By Tim Mullaney

Source : https://www.thestreet.com/story/13747749/1/fed-walks-tightrope-on-guidance-after-leaving-rates-unchanged.html