|Dow||+92.35 to 18,209.19|
|S&P 500||+5.82 to 2,115.48|
|Nasdaq||+7.15 to 4,968.12|
|10-YR Yield||-0.07 to 1.99%|
|Gold||-$0.90 to $1,199.90|
|Crude Oil||-$0.33 to $49.15|
Here’s What it Means for Markets …
One of the Federal Reserve Chairman’s most, ahem, “enviable” tasks is the semi-annual appearance before Congress. I often wonder if Fed Chairs feel a little like prisoners being led to the gallows as they trek across town … take a seat before the Senate and House Banking Committees … and opine about the state of the economy, inflation, interest rate policy, and more.
The questions that follow from various Congressmen and women tell you as much as about the political climate as they do about the economy. Oftentimes, these people just want to score a few political points by bashing the Fed or talking up their pet tax and spending projects, rather than actually learn something.
|The testimony the Fed Chair delivers to Congress can lead to sizable moves in stocks, currencies, and commodities.|
But the prepared testimony the Fed Chair delivers first … and some of the answers that follow … can provide useful information to investors like us. They can also lead to sizable moves in everything from stocks to currencies to commodities, so that’s why I pay attention.With that in mind, what did Yellen have to say today?
First, she said in her prepared testimony the U.S. economy looks to be in pretty good shape! She noted the fall in unemployment to 5.7 percent from 10 percent during the Great Recession … the increase in the monthly pace of job creation to 280,000 at the end of 2014 … and the rise in real GDP growth to a recent pace of more than 3 percent. While she did talk about lackluster housing-related spending, she didn’t sound too concerned.
Second, she talked about how interest rates have generally declined despite the improvement in the U.S. economy, and discussed how oil prices have done the same. Her stated causes: “disappointing foreign growth and changes in monetary policy abroad” when it comes to rates, and “increased global supply” when it comes to crude.
Finally, she said that inflation has remained subdued and that not all of that stemmed from lower energy prices. She concluded that the Fed would maintain a “high degree of policy accommodation” as a result, but that the Fed continues to believe that the economy will improve, and that such improvement will require the funds rate to be adjusted before too long.
|“The Fed has repeatedly done the wrong thing over the last several years when it comes to policy.”|
So what do these latest comments from Yellen mean for the markets?
Well, my personal view is that the Fed should have already raised rates at least once. Failing that, they should do so very soon this year — as early as April. Nothing in today’s comments suggests the Fed is worried about an economic relapse, so the rationale for crisis-era monetary policy is completely lacking.
But the Fed has repeatedly done the wrong thing over the last several years when it comes to policy, so we will have to see on the timing. Regardless of exactly when it happens, the first rate hike and the ones that follow are precisely the kinds of events that can create “Bloody Wednesday” reactions in a wide variety of markets.
Something you absolutely need to understand: The process will occur in stages. Violent currency moves are the first likely consequence of divergent monetary policy paths here and abroad. And sure enough, we’ve already seen a “Swiss Shocker” and a “Canadian Cannonball” created by surprise policy moves in those countries.
Large interest rate fluctuations are another side effect that we’ll see sooner rather than later. Heck, Treasury bond investors just suffered the worst monthly losses in five years after wildly inflated bond prices took a tumble.
For many stocks, we all know that rate hikes are ultimately a kiss of death. Every Fed rate-hiking cycle has led to incredible market turmoil eventually, from the dot-com bust to the housing collapse.
But it takes time — a cumulative buildup of interest rate pressure. Many high-quality stocks in select promising sectors will actually rise early on in a hiking cycle, even as weaker, low-quality ones in certain sectors get hammered.
I believe my many, many years of experience tracking Fed policy and interest rates … as well as Martin’s decades of doing so … help make us uniquely qualified to help you navigate what’s coming. So keep your eyes on Money and Markets for updates as the Fed’s policy path unfolds before us.
In the meantime, let me hear your thoughts on the matter. Do these latest Fed comments suggest to you that a rate hike is coming before long? Why or why not? And regardless of what the Fed is doing, what do you think they should be doing? How are you adjusting your investing strategy in light of the unfolding policy outlook, if at all?
The link to the Money and Markets website can be found right here. Let me (and Janet Yellen!) hear what you have to say!
|Our Readers Speak|
Walt Disney’s (DIS, Weiss Ratings: A) triple-digit ticket gambit was the topic at hand yesterday, and you had a lot of thoughts about why the entertainment giant made its move — and what it means more broadly for the economy.
Reader J.R.J. said he thinks Disney’s move is just a harbinger of what the economy overall is likely to see …
“High inflation is on its way. Some reasons:
“1) Fed, state and cities forcing higher wages, called raising minimum wage.
“2) Wal-Mart, the nation’s largest employer, is raising wages. These moves will force competitors to raise wages to keep/obtain employees.
“3) Recent strikes at West coast ports and oil refineries may mean that union power has bottomed and is on the way up. That would make sense since government reports much higher employment and a tightening labor market.
“The Fed will likely accommodate these wage increases by supplying more fiat currency to allow people to pay the higher prices coming from higher wages, Obamacare and likely higher commodities. So my conclusion: GOT GOLD?”
Reader Louise C. concurs on inflation, adding that many families may find themselves priced out by Disney’s move: “Of course inflation is rampant in all phases of the market, and Disney is no different. However, $105-per-admission is going to rule out a lot of families with several children, and that’s sad because Mickey Mouse and his buddies are what healthy fantasy is made of.”
Reader Ray K. picked up on that train of thought, too, saying: “They really are starting to stretch the ‘limit’ that people can afford. I have a daughter who lives in Florida. She has had an annual pass for a long time. She is switching to Universal … just more affordable. She is a real Disney lover, too.
“My wife and I bought a 10-pass ticket a couple years ago, which was a good deal. The passes were a one-day park hopper with no expiration date. Say goodbye to those deals, too. They will no longer be offering tickets with no expiration date. Even though our daughter lives close to WDW, we will likely not go as often after our present passes are used. Just too expensive.”
And of course, Disney won’t win any new converts among the sizable crowd of people who don’t like to deal with theme park problems (long lines, expensive meals and parking, etc.) in general. As Reader Bill S. said:
“Disney just continues to milk the public every chance they get. But as long as they can get people to stand in line for two hours for one ride, it won’t change. Take a look at the salaries of some of the executives and you don’t need to know anything more. It is obscene. Just one more reason not to live in Florida.”
Haha! Well, I wouldn’t go as far as Bill. We have plenty of free, crowd-less benefits to enjoy as well. I bike or run in the beautiful weather at least three or four times a week … enjoy the neighborhood pool many, many times per year … and BBQ on the back porch even in the depths of December!
But I do know that theme park crowds — and theme park prices, especially now — aren’t for everyone. The lack of a need to factor airfare in makes a big difference for my family though … just like it does with one of our other favorite kinds of vacation — cruising!
If you’d like to add to the discussion, don’t forget: It’s as easy as clicking here and typing out your comments.
|Other Developments of the Day|
Home Depot (HD, Weiss Ratings: A) continues to tack on points, this time after announcing strong quarterly profit and an $18 billion stock buyback program. The home improvement retailer earned $1 per share excluding items, besting the average estimate of 89 cents. Same-store sales rose a healthy 7.9 percent in the fourth quarter that ended Feb. 1.
Are you @R$@%*@ kidding me? Now, the Justice Department is investigating ten mega-banks from the U.S. and Europe over manipulation of the precious metals markets.
The latest investigation follows others covering rigging of interest rates and currencies. The list of banks receiving subpoenas is your standard banking rogue’s gallery: HSBC Holdings (HSBC, Weiss Ratings: C), Barclays PLC (BCS, Weiss Ratings: C-), Goldman Sachs Group (GS, Weiss Ratings: A-), and JPMorgan Chase (JPM, Weiss Ratings: A-), among others.
Greece has fallen back into line, and the European Commission is pleased. The pan-European group called Greece’s proposed economic reforms “sufficiently comprehensive” — ensuring that Greece will get another four months of debt relief. Then we get to go through this whole farce again. Oh joy!
Russian President Vladimir Putin took to the airwaves to talk about Ukraine, Crimea and more. While he warned that a full-on war with Ukraine would be “apocalyptic,” he said he doesn’t see one as likely in the wake of the Minsk cease-fire deal.
At the same time, he basically said he would never give Crimea back. So we might as well start redrawing those maps unless Europe and the U.S. do more than issue mealy-mouthed protests … which they won’t.
Oil prices are treading water around the $50 a barrel mark — and Nigeria isn’t happy. The country’s oil minister said OPEC members are talking behind the scenes about holding an emergency meeting sometime in the next six weeks.
The 12-nation group could vote to cut production, but only if the biggest player — Saudi Arabia — agrees to go along. No official word yet out of the kingdom or other OPEC members in its backyard.
Anything you’d like to add on these topics? Then don’t forget about the website — it’s your best outlet!
Until next time,