Recall that I was looking for four events to occur for the stock market to get back on its rails and end the Great Correction of 2018. Those four were:
1) China and the US would settle trade tensions. Both nations agreed after the G-20 to suspend further tariff increases and work on a trade agreement. All indications are that behind the scenes, such an agreement is being worked on.
2) A Brexit settlement would be finalized. The UK and EU have agreed on the terms of an agreement. However, the UK Parliament has not approved the agreement. Theresa May survived a no-confidence vote but has not put the agreement up to an approval vote yet. Hence, we still must wait for the clouds to lift from this uncertainty.
3) The FOMC would come to grips with the damage that it has done to the USD and global financial markets. A few weeks ago, it appeared that FOMC Chair Jerome Powell got the message. However, yesterday, it became apparent that he was nothing more than a dogmatic monetary recidivist and failed the markets. More on that below.
4) Apparent weakness in iPhone sales for Apple (AAPL) need to be refuted by CEO Tim Cook. Whereas he did not refute such contentions; another senior executive did make positive comments. Furthermore, there are many indications that AAPL is moving its supply chain onshore to the lower forty-eight states.
So yesterday, the FOMC raised its target rates by ¼%. In the FOMC statement, verbiage was changed from:” The Committee expects that further gradual increases in the target range for the Federal Funds rate…” to “The Committee judges that some further gradual increases …” As a result, the Dot Plot, an indication of future interest rates, was lowered by ¼%. So far, so good. The stock market was higher before the announcement, sold off into the red and then rallied back to slightly in the green. This is normal market volatility around a FOMC rate announcement.
Then FOMC Chair Jerome Powell conducted his press conference with the financial media. He was decidedly dogmatic. Rather than respecting that inflation was under control and global growth was decelerating, Powell preferred to see needs for further rate hikes. He failed to recognize what caused the financial crisis – rapid over tightening of intertest rates.
All the market wanted (needed) was some honesty; namely, that the FOMC will take a wait and see approach as new data comes in. Powell failed by not acknowledging that the Fed’s reduction of its balance sheet was in and of itself a form of tightening and that raising the target Fed Funds Rate might be a double dose of tightening. He also failed in realizing that further rate hikes would further bolster an already strong US Dollar, something that hurts US exports. Lastly, with over $20 trillion in outstanding debt for the US Treasury, every ¼% rate hike costs taxpayers tens of billion of dollar a year. Jerome Powell does not write that check – you and I do.
Interestingly enough; Powell was asked whether he felt any political pressure not to raise rates. He answered “no”. Over dinner with my wife and son, I was asked whether Powell could be fired. I explained that the FOMC is an island unto its own. The FOMC Chair is appointed by the President and confirmed by the Senate. However, the FOMC Chair has no boss. There are simply no statutory reporting lines. Twice a year, Powell will be required to report to both houses of Congress in what we refer to as Humphrey-Hawkins testimony. It is a dog and pony show, without any consequence.
So, can a President fire an FOMC Chair? There is a very vague clause of the Federal Reserve Act – Section 10.2 which states: “…the President shall fix the term of the successor to such member at not to exceed fourteen years, as designated by the President at the time of nomination, but in such manner as to provide for the expiration of the term of not more than one member in any two-year period, and thereafter each member shall hold office for a term of fourteen years from the expiration of the term of his predecessor, unless sooner removed for cause by the President….”
So, in some sense, Powell is beholden to the President, depending on your definition of “for cause.” One might argue that doing damage to the economy and stock market is “for cause.” Moral turpitude could also be an acceptable definition. If Powell worked for me, I would fire him. I expect that President Trump, who has no patience for disloyalty or incompetence, is already considering the dismissal of Powell.
In the meantime, Powell has left the stock market in a mess. He turned an already oversold market into even more deeply oversold. Admittedly, the FOMC sees inflation hovering around its 2% target and US economic growth still strong albeit at a slightly lower rate. Taken together, earnings will remain strong and inflation weak, which will bode well for stocks.
So once again, we will have to endure some more pain in the stock market in the short run. If, however, you can stand the heat; a year from now, the US equity markets will not only be higher, but I expect to be a record levels. We will get there faster if Powell has an epiphany or is replaced by someone more competent and market savvy.
Bottom line, the Federal Reserve is broken and needs to be modernized.
Some housekeeping. On Sunday, I will publish my annual list of 10 Things (I want to make sure that my friend and colleague Karen has it in time for Christmas). Next week I will issue another My Gut Feeling. The first week in January, I will publish My Gut Feeling For 2018 – A Look Back where I grade my prognostications for 2018. Finally, My Gut Feeling For 2019 will be published the second week of January.
Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView AssetManagement, LLC was long AAPL although positions can change at any time.
Scott Rothbort is the President & Founder of LakeView Asset Management, LLC, a registered investment advisor specializing in high net worth private wealth management. For more information on investing with LakeView Asset Management, LLC call us at 888-9LAKEVIEW or request more information by clicking on the contact button on the top right hand corner of the website. LakeView Management, LLC is a Nevada LLC, with its principal office located in Henderson, NV and branch office located in Millburn, NJ
Scott Rothbort is also the publisher of the LakeView Restaurant & Food Chain Report, a newsletter focusing in on food, restaurant, beverage, and agricultural stocks. An individual subscription to the newsletter can be ordered at www.restaurantstox.com Furthermore; Scott is a professor at the Seton Hall Stillman School of Business in South Orange, NJ.
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