Things Can Change Quickly These Days

June 10, 2019|3:49pm


What a difference a week can make in this game, right? Last week at this time, the market was reacting in a rather hysterical fashion, of course, to news that the President was planning to use punitive tariffs in his quest to strike a deal on immigration with Mexico.

At the beginning of last week, traders were also fretting that the Fed would turn a blind eye to the mounting impact of tariffs and the now obvious economic slowdown happening around the globe. The fear was the Fed would wind up making a policy mistake, which could lead to a recession here at home.

And last week, stocks were breaking down below important support and the media’s favorite technical indicator – the 200-day moving average. The bearishly inclined opined that this was a harbinger of bad things to come and that a full-fledged retest of the December lows was on tap.

Things Were Getting Ugly

The price action was clearly negative. Sentiment had become dour. Technical indicators were breaking. Market models were flashing red. And the words, “here we go again,” summarized the outlook of several market analysts I chatted with.

However, a funny thing happened on the way to the market debacle, things changed – quickly. Headlines began crossing that countered the big fears and before you could check the spelling of the word tariffs, stocks turned around. Shorts covered. Algos went the other way. And in the end, the S&P had one of the best weeks of the year.

Such is the way the game is played in a news-driven market environment. Good times.

The Mood Improved

First there was word that Mexico had scurried up to Washington to try and satisfy the administration that it was doing enough to avoid getting slapped with punitive tariffs. And after a couple days of chatting, bam – a deal was done. Granted, it was basically the same deal that we had already agreed to. But the bottom line is President could put “W” on the board on this one. Problem solved.

The Fed “Gets It”

But the big news and the big driver of the stock market’s joyride to the upside was the latest pivot by the Fed. Just when things were starting to look grim, Mr. Powell and company rode to the rescue by saying they were thinking about cutting rates.

No, the Fed Chairman did not say the Fed was ready to cut rates. Well, not in so many words. But those who spend their days analyzing the Federal Reserve board felt that Mr. Powell and several of his cohorts had effectively put what is referred to as “the Fed put” back on the table.

For example, St. Louis Fed President James Bullard kicked things off on Monday by saying that a rate cut could be “warranted soon.” While this didn’t necessarily turn the market around, this message did seem to set the stage for Mr. Powell.

According to Fed watchers, Powell didn’t disappoint. Sarah Bloom Raskin, who sat on the Fed board from 2010 to 2014, suggested on CNBC Wednesday that the U.S. Federal Reserve has sent a “very strong signal” that it’s ready to consider cutting interest rates.

Specifically, Chairman Jerome Powell said in a speech that the Fed “will act as appropriate to sustain the expansion.”

To someone who has been in the room, those words meant that the Fed was paying attention and wouldn’t hesitate to act in a dovish fashion. Raskin said on CNBC, “I think Chairman Powell has given a message to markets that’s indicating that a rate cut is coming. This is, in essence, a very strong signal that the FOMC is actually ready to talk about cutting rates.”

Then when you mix in the comments made recently by other Fed officials, the message becomes even more clear.

For example, Mary Daly, the President of Federal Reserve Bank of San Francisco said early last week that uncertainty over trade and tariffs could cause business to take a wait and see approach, which, could in turn, slow the economy further.

“What really keeps me up at night is the data and the mood getting out of sync and, eventually, the possibility that the mood becomes the self-fulfilling prophecy of the data,” Daly said at a conference on Monday.

Daly suggested that if “people are really uncertain, they fear a recession, or they fear a downturn and this gets incorporated into their thinking and then they spend or invest less.” And extrapolating, “less spending and investment creates a slowdown that we wouldn’t have otherwise had,” Daly said.

Mohamed El-Erian, Allianz chief economic advisor, also offered thoughts that were worth noting. El-Erian said on CNBC last week that market volatility is higher because the market is looking at a period of unusual uncertainty.

El-Erian said the “economic outlook is more vulnerable… I think it means market technicals are more fragile, and it involves a higher risk of a spill back from disrupted markets to the economy. It’s a different outlook than it was last week.”

So, the good news is that it seems Mr. Powell “gets it” here. Powell is effectively saying that the Fed understands that uncertainty regarding trade and the administration’s use of tariffs as a political weapon could easily wind up slowing the economy. And since the President has held firm to his desire to negotiate on many fronts, the reality is that this game isn’t likely to end anytime soon. As such, it appears that Jerome Powell is reassuring markets that the Fed will be there if things go awry.

To which, the stock market basically said, “thank you.”

So, on this fine Monday morning we can eliminate the fear over Mexico and the fear that the Fed is going to make a policy mistake. These are two pretty big check marks. Which would appear to be why the S&P 500 is back to within a stone’s throw of all-time highs.

Now if we could just get that China deal done…

Thought For The Day:

Logic will get you from A to B. Imagination will take you everywhere. – Albert Einstein

All the best,
David D. Moenning

David D. Moenning


At the time of publication, Mr. Moenning and/or Redwood Wealth Management, LLC held long positions in the following securities mentioned: None

Note that positions may change at any time.


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