This article was published by The McAlvany Intelligence Advisor on Monday, October 29, 2018:
Instead of asking “Is the sell-off in stocks likely to continue?” or “If so, how far and how fast?” or “Is it a precursor to the economy peaking?,” a better question might be: Just how far, how high, and how fast might both stocks and the economy move if the Federal Reserve were to step aside?
It could happen. It’s already on the table. In a brief comment made by the No. 2 man at the Fed, the newly-arrived Richard Clarida, at the insider-controlled Peterson Institute for International Economics last week, said not only is the U.S. economy “very, very solid,” he added that “I believe that some further gradual adjustment in the federal funds rate will be appropriate.” This is code-speak for possibly taking the December rate hike out of consideration. As The Wall Street Journal noted, the “some further” description is a “subtle phrase” used in the past “to signal that officials are debating an end to such rate increases.”
At the moment, there are two “camps” on the Fed’s Board of Governors: those who favor raising rates again in December, and those who don’t. The latter camp says that if price increases don’t appear to be moving beyond the Fed’s two percent target, the board “might want to slow or suspend rate rises.”
The central bank’s preferred measure of inflation (i.e. price increases caused by that bank) is the Dallas Fed’s price index for personal consumption expenditures, or PCE. During the third quarter, that index rose on an annualized basis by just 1.6 percent, well below the Fed’s “target” of two percent.
Further supporting the latter camp’s position is the Fed itself. Last week, the Fed’s “beige book,” which reflects anecdotal information about economic activity in each of the Federal Reserve’s 12 districts, showed “modest to moderate” economic activity as fall approached. It also showed that business owners remain optimistic about the economy’s present growth trajectory. Notably missing was any feedback about costs of goods used in manufacturing getting out of hand, or painful needs to raise prices to offset increases caused by Trump’s tariffs strategy.
Those supporting the idea that Wall Street’s selloff since October 3 is just a brief though unsettling “panic” include many of the country’s major money managers. That includes Bruce Bittles, Robert W. Baird’s chief investment strategist: “The economic fundamentals remain favorable. Given the strength in the labor markets and confidence levels among small businesses, the odds of a business downturn are unlikely. We remain bullish on the U.S. economy.”
John Mallen, chief investment officer at Helios Quantitative Research, said, “We’re not overly worried about this being the early legs of a large-scale market correction in conjunction with a recession. I don’t see anything so dire from an economic data perspective that will create a 20% drawdown [i.e., a “bear” market]. I think [what has happened since October 3] is very technical in nature.” Added Mallen: “We might have a gut-check correction, but that might be a good buying opportunity for another good run.”
How much of a “good run” might that be? Robert Bacarella, founder and chairman of Monetta Financial Services, believes Trump’s tax cuts and overseas tax holiday have extended the bull market in stocks by at least another couple of years: “The bull market that started in 2009 is still intact.” Darrell Riley, a strategist at T. Rowe Price agrees: “The economy has a lot of momentum going into next year and monetary policy [interference in the economy by the Federal Reserve] is still stimulative. The economic cycle may go on longer than we think … [perhaps] a lot longer than we think.”
It’s really up to the Fed. The Fed’s ramping up of interest rates, and its threat to continue to do so (in order to keep the economy from “overheating”), is putting sand in the gears of the greatest U.S. economic rebound seen in decades.
The Commerce Department reported last week that third quarter GDP came in at 3.5 percent on an annualized basis, following a second quarter spurt of 4.2 percent. That makes it the strongest performance by the U.S. economy since the end of the dotcom bust in 2002. Unemployment remains at record lows, with formerly unemployed women entering the labor force in numbers never seen. Some 80 percent of American companies report earnings that have exceeded Wall Street’s expectations, consumer and small business owner sentiment is at record high levels, and the beat goes on.
To be sure, nervous nellies are watching the housing market closely to see if the decline in that sector has legs, thanks to interest rate increases already inflicted on the economy by the Fed. The same goes for new car sales, and for the same reason. On the other hand, declining oil prices are being followed by lower gas prices at the pump, translating into a virtual tax-free wage increase for the country’s 222 million licensed drivers.
If the Fed’s Board of Governors so much as hinted that it was considering delaying or eliminating the December rate hike altogether, stocks would bounce back massively, reflecting the healthy economy that the Fed is trying to rein in.
It could happen.