Patience is a Virtue

Patience is a virtue.  Markets rallied for another day as Fed speakers led by Powell doveishly proclaimed their patience.  As the government shutdown entered its 20th day, investors focused on the positives and not the negatives as a steady stream of Federal reserve speakers underscored the recent wait and see strategy.  Wait and see is nothing new for the Fed but it was important for investors to know that they (the Fed bankers) were sympathetic to the recent market shakiness.  The message was: with inflation under control we have the ability to be patient to see how things play out with the Chinese trade war and the poorly performing markets.  What that really means is that if the Chinese trade issue is resolved, markets improve (as they have been), or inflation starts to rise, the tightening will carry on.  You may recall that the Fed paused their tightening for the entire year in 2016 after a tumultuous 4th quarter for equities in 2015.  What is different this time around however is that there are some real economic headwinds that didn’t exist in 2016.  Global growth is slowing, the labor market is tightening, and the federal deficit is on the rise, nearing the record levels only achieved in the wake of the financial crisis as the Government had to spend money on bailouts and stimulus.  Further, the US debt, which is now at a record $21.565 trillion and growing worries even the calm and cool Fed Chief.  So while markets certainly appreciate that the Fed may slow the pace of hikes, they have largely ignored the message that the slowing is not meant to make things better for investors but rather in response to negative factors affecting the economy.  Yesterday’s lack of news combined with what appeared to be a concerted Fed effort to get the message out was good enough to propel the S&P500 out of correction territory.  The index rose by +0.45%, while the Dow Jones climbed by +0.51%, the Russell 2000 increased by +0.46%, and the NASDAQ 100 traded up by +0.31%. The S&P 500 and the Dow Jones are just under key points of resistance at 2600 and 24000 respectively (see charts 4 and 6 in my attached daily chartbook).  The Russell 2000 will encounter similar resistance at its 1448 Fibonacci line (see chart 7 in my attached daily chartbook) and its momentum continues to improve though it is still negative.  The S&P, the Dow, the R2K, and NASDAQ all remain risk off.  Bonds traded down yesterday leaving the ten year yielding 2.74% reflecting the movement of capital into risk assets.

This morning we will get a read on inflation through the Consumer Price Index (CPI), which will likely show a year over year growth of +1.9% down from last month's reading of +2.2%.  The decrease is likely due to the recent downward move in crude oil.  The Core CPI, which does not include energy, is expected to show price growth of +2.2% flat from last month’s figure.  More discussion around the Fed’s easy stance will be in the market today and traders are still on alert for if and when the shutdown might start to affect the real economy, if not the recent positive investor sentiment.  Have a great weekend and please call if you have any questions.

daily chartbook 2019-01-11