It’s an old adage … the market hates uncertainty.
Market watchers yesterday were all about what the Federal Reserve’s Open Market Committee was going to do about interest rates and its balance sheet, not to mention Fed Chairman Jerome Powell’s statement.
It was only in December – a mere three months ago – that the Fed and Powell tanked markets by raising interest rates a quarter percent (to 2.25%) and Powell stating that the Fed would continue its balance sheet rolloff.
As I’ve written before, during the December press conference, I watched the market turn from positive to negative during Powell’s press conference based upon his comments.
So, this time around, the question was whether the FOMC and Powell would do what the market expected or would they throw another curve ball?
As I’m sure you’ve read by now, the Federal Reserve took no action on its benchmark interest rate yesterday, but there were two big pieces of news about the future.
And, more importantly, it didn’t really provide the certainty some were looking for.
Most Fed officials (11 out of 17) agreed an interest rate hike would not be needed in 2019.
In December that number was two and Powell made headlines when he stated there might be two interest rate hikes (instead of three) in 2019. So, this change over three months is not insignificant.
The statement provided some certainty about the future of interest rates in 2019, but overall there is still a lot of murkiness and I’ll explain why in a moment.
Secondly, the Fed said it would end its balance-sheet reduction program in the fall. If you were around and in the markets during the financial crisis, you may remember that the Fed’s balance sheet grew by leaps and bounds since then.
In August 2007, the Fed had assets worth $858 billion on its books, and has $4.45 trillion today. Many credit the Fed’s intervention with the balance sheet purchases for helping put markets back on track.
The Fed is currently allowing $30 billion in Treasury proceeds and $20 billion in mortgage backed securities to roll of the sheet, while reinvesting the rest.
Chairman Powell said the amount for Treasuries would drop to $15 billion in May, and all mortgage-backed securities would be reinvested.
So, what does this all mean for investors?
At InvestorPlace, we have elite market advisers and investing professionals to help us provide the bigger picture for your portfolio. And although most viewed the Fed’s statement as a positive development, there is still enough uncertainty to keep investors on their toes.
For Neil George, editor of Profitable Investing, the Fed delivered good news for the market in the short term after making some errors last year.
The key for me is that the core PCE (Personal Consumption Expenditures) remains below 2.00% and shows little threat to rise above. Meanwhile, the bond market is showing strong and sustained demand for all types of credit from Treasuries to munis to corporate bonds of course. This is very important as it shows a good off-set to any roll-off of the Fed’s bond portfolio.
Meanwhile, the globe has trouble and the FOMC sees this. Europe is very close to recession risk and many of the leading banks never fixed balance sheet issues from 2007-2008. China is slowing in growth and the People’s Bank is easing to support the economy and to keep credit flowing.
Latin America is a mess like some other bad spots.
And the FOMC and the Fed wants and needs to keep things calm and flowing. They made bad mistakes last year with the portfolio roll-off and the target range increases. And while I do like the normalization in shorter-term rates – the Fed should have been easier on the bond portfolio.
Neil notes that there are still some worrying signs and he has advised his Profitable Investing subscribers to keep their eyes on the following data points: US-China trade negotiations, the next round of election uncertainty, slowing global growth, and the lingering concern from last quarter over slower earnings expansion in 2019.
Neil has a strategy that investors can count on regardless of the market starts and stops, but also advises investing in specific sectors that are benefitting from the broad economic climate. You can read more about Neil’s advice by clicking here.
Louis Navellier sees similar concerns.
Louis, editor of Growth Investor, made a similar observation recently about signs of a global economic slowdown and what that means for the US economy. Here is an excerpt from a recent Webcast Louis hosted for his Platinum Growth subscribers.
As you look around the world, the U.S. is the oasis. And the main reason is that they have low to negative rates around the world.
Just as a reminder, the European Central Bank and the Bank of Japan still have negative interest rates.
So, some of this is caused by the Brexit mess … A lot of it is the China slowdown over Asian stocks, and emerging market stocks are turning fast. But the real problem, if you look around the world, is we’re just negotiating with everybody else … So, there’s a lot of international capital flight to America that’s shoving our treasuries lower. In fact, on Friday, the 10-year Treasury was 2.6%. So, that’s the big deal, okay. Everybody wants their money in dollars.
Once again, Louis has been warning his subscribers about this for months now. U.S. stocks would be the beneficiaries of the global economic uncertainty, and he has prepared a presentation outlining his views here.
Over the longer term, folks are now worried that with relatively low interest rates and the end of the balance sheet runoff, the Fed won’t have much ammunition when the next recession does occur.
The significant shift in policy over the last three months has left many observers scratching their heads.
Matt McCall, editor of Investment Opportunities, has previously called Jerome Powell, “completely out of touch” and he thinks this latest statement has done nothing to improve the FOMC’s credibility.
A few months ago the Fed was talking about several rate hikes in 2019. A few weeks later they backed down the hawkish rhetoric. And this week the wishy-washy Fed said no rate hikes in 2019.
I would love to know what changed in the last few months that would result in such a dramatic viewpoint. The Fed’s job is to think long-term. Look at the big picture. Not change their view every time the winds shift.
My view has been no rate hikes in 2019 and I continue to back that approach. As far as the stock market, we are still in the goldilocks scenario of low interest rates, low inflation, and a U.S. economy that is growing around 2%. You must own stocks with the “Fed put” under the stock market.
I can’t think of a better summary for investors.
To be sure, there is still a lot of uncertainty in the markets. More than many investors are comfortable with.
But if the Fed continues down this path, investors still have to be in the market, even if the gains are going to be narrower now than in the last 10 years. Picking winners from losers is going to be more difficult, but the economic conditions and “Fed put” should provide support in the near term.
To a richer life…
Luis Hernandez, Managing Editor
and the research team at InvestorPlace.com