Siebert Financial : What Lies Behind The Mask

What lies behind the mask. Equities closed mostly flat yesterday as earnings offset lingering fears of the Coronavirus outbreak. The Fed held interest rates steady and offered a few hints about the future.

N O T E W O R T H Y

• Well-Fed. The Fed has spoken… or was it just a rerun from the last meeting? No one expected fireworks from the Fed yesterday and they delivered, as expected, mostly nothing. So here are some highlights. There was no adjustment to interest rates. The Fed believes that they are slightly below r-star (r*). That is cool terminology for the natural, or neutral interest rate. When rates are below that, they are considered accommodative and have an expansionary effect on the economy. So rates, as they are today, will continue to sustain economic growth. They see the employment situation as being in good shape…thanks for underscoring the lowest unemployment rate in fifty years. Inflation remains slightly below the Fed's target, which is great for consumers but not for businesses who rely on price increases to grow their revenues. Speaking of the consumer, the Fed is slightly concerned about the health of consumption. I used the word slightly, because in their statement, they changed one word to describe household spending. 'Strong' turned into 'moderate', and while 'moderate' is still positive, the slowdown should be noted. Looks like there aren't going to be any big makeovers to policy for 2020… for now. One notable change that may happen is in the Fed's open market operations. The Fed uses repurchase agreements (REPO's) to add liquidity (AKA cash) to the economy. They insist that it is meant to bolster bank reserves but the fact is that they have been essentially buying securities in the open market since late last year, which is technically quantitative easing. Remember that perception is important to the markets and if investors know that the Fed is buying, they may be more inclined to buy as well. Speaking of that buying, Powell expects that the Fed will taper off its REPO activity in April. While markets did not react negatively to this statement, many analysts set calendar events for April, at which time the real test will come. Powell did answer at least one question about the virus outbreak in China, stating that it could impact the Chinese economy but would have limited effects on the US economy as it is largely reliant on domestic growth. Thanks for that, Fed. See you on March 20th, just 48 days away.
• Slope-a-dope. Remember the yield curve? It was a big thing earlier last year because it was inverted. That means that the spread between the yield of 3 month T-bills and 10-year treasury notes is negative. In plain terms, you get more yield from lending your money to the Treasury for 3 months versus ten years. That shouldn't make sense as one would expect to get a term premium for committing capital for a longer time period. Though that may seem odd, the real reason many investors raise an eyebrow is because of the inversion's history of predicting recessions. When investors fear that things will be rough going for the economy in the future they buy 10-year treasuries pushing prices of the notes up which makes their yields go down. Shorter maturity debt is tied to Fed policy which, as mentioned just above, remains unchanged. The net result is that the yield curve flattens and could invert… which it has once again after it became positive last October. Remember that yield curve inversions usually happen before a recession but it is important to note that: 1) inversions don't cause the recession they are just good at predicting them, 2) we don't have a good handle on how long after the curve inverts a recession will occur, 3) in markets, what happened in the past doesn't always happen in the future. For now, let's put the yield curve back on the radar.

THE MARKETS

Stocks ended mixed yesterday as solid earnings kept investors jovial while the death toll from the Coronavirus rose. As of this morning there have been 170 deaths with at least 6,000 confirmed cases of the virus. The S&P500 fell by -0.09%, the Dow Jones Industrial Average inched up by +0.04%, the Russell 2000 dropped by -0.55%, and the NASDAQ Composite Index advanced by +0.06%. Bonds climbed and 10-year treasury yields fell by -8 basis points to 1.58%… bond traders were listening to Powell.

NXT UP

- Annualized GDP is expected to have grown by +2.00% for the quarter, compared to the prior reading of +2.1%.

- Personal Consumption may have grown by +2.0% , lower than last month's +3.2%. growth.

- This morning Northrop Grumman, Sherwin Williams, and Verizon missed estimates, while Altria and Valero Energy beat estimates. We will hear from Tractor Supply, Biogen, and Levi Strauss before the bell. After the market announcements include Electronic Arts, Western Digital, Visa, US Steel, Amgen, and Amazon.

Let's talk, really

I will be meeting clients in our Miami and Boca Raton offices next week. We will also be holding a seminar on Tuesday night in Boca Raton which will feature a number of our investment partners. I will be speaking on the state of the markets and our AdvisorNXT management platform. Please reach out and set up some time to meet with me.

daily chartbook 2020-01-30