Two weeks ago I showed you this chart, which shows how much better the U.S. economy has performed this year versus economists’ expectations: click the chart, then wait a second, then click it again to enlarge…
This was support for the notion that economic risk in the U.S. remains tilted to the upside.
Last week I offered up a plethora of data—from an increase in business capital investment, to robust Ford truck sales, to an increase in the labor force participation rate, to record hotel occupancy rates (to name just four)—in support of my claim that the economic trend is markedly improving (while acknowledging potential headwinds [such as central bank policy]).
This week saw 23 economic indicators published, of which 12 beat economists’ estimates, 6 met expectations and merely 5 disappointed (but not by much). Plus, and this is a big “plus”(or minus, as the case may be), inflation reads are starting to, well, read inflation. Here’s from Bespoke on this week’s CPI report:
Core CPI is up to 2.3% over the last year but is up to 3% annualized in the last three months. That’s despite ongoing energy declines. Apparel prices have shot higher to start the year, up almost 8% annualized, while services have been by far the largest impulse. Shelter is accelerating in cost again while anything involving labor inputs is trending steadily higher and generally accelerating.
So, as I intimated in my weekly TV interview, in my view (and I was far from alone) the Fed—coming out of this week’s policy meeting—would leave rates as is (as expected) but, being “data dependent”, would surely signal to the market that inflation (their target) is close at hand, that the labor market is tight and that the economy can withstand higher interest rates, and soon!
And what did the Fed deliver? An across-the-board downgrade of its economic, inflation and interest rate expectations going forward! Say what?!?
So what’s the Fed up to? Well, other than punishing those who were logically short interest sensitive securities last week, the Fed is either reaching beyond its dual mandate (full employment and stable prices) or is concerned with the economy’s ability to sustain an upward slope amid our global partners’ central banks’ easing campaigns and ahead of a tumultuous political environment at home (you’ve got to be kidding me!) and abroad (particularly Europe). I.e., things are looking up and they don’t want to screw things up by admitting that things are looking up! I.e., they’re in no mood to presumably (or potentially [I have my doubts that it would]) boost the dollar and catch the blame for halting what has been an impressive 5-week rally in global markets—by threatening anything other than the most gingerly path to higher interest rates.
It should come as no surprise that equity markets rallied hard on the Fed’s about face.
Beyond the market’s kneejerk reaction to the Fed, I see a pretty nice setup going forward (no guarantees of course). The economy, as I’ve been suggesting for months, is far better than a raft of doomsayers (and apparently the Fed) preferred we believe to start the year. Market breadth—participation across sectors, new highs, etc.—has been very impressive. The dollar is posing no present threat; in fact, technically-speaking, it’s breaking down (that’s bullish for the stock market and commodities). Mutual fund managers, according to the Bank of America Merrill Lynch monthly survey, are sitting on more cash than they normally do, their allocations to U.S. equities remain below their long-term mean and they remain generally pessimistic (that’s a good thing!)—and, as I’ll illustrate on the chart, stocks have shattered previous levels of technical resistance.
Of course it’s never perfect when it comes to the market: The recent rally has stretched valuations (in the aggregate) to a point where I’m back to telling folks that stocks are richly valued, although the Fed just quelled that concern a ton (as stocks tend to stay richly valued while interest rates stay strictly low). The jury’s out as to whether the recent lack of correlation between stocks and oil, on some days, is a sign of a more normal relationship or simply a trial separation. That’s an issue because, given the stubborn glut in oil and other industrial materials, we can’t be sure that the recent rally in commodities is the start of the next bull market or a simple head fake. I can tell you this, however, we’ll get there: Commodity production is declining and expansion plans are terminating, thus it’s only a matter of time (how long??) before the supply/demand equation flips and higher pricing makes fundamental sense. In the meantime, markets anticipate…
And, lastly, in the very short-term stocks look way overbought to me. Which, of course!, is of no consequence to you long-term investors—it’s just me helping you keep the short-term in perspective.
Take a look: