Frothy

 

1. The big disconnect.  I just can’t help myself.  They say ignorance is bliss… and I believe it.  There are days when I watch markets trade up and search diligently for any real drivers or connections to the economic picture… to no avail.  There are many well-known adages that sound something like “the market is not the economy”.  While those proverbs are true, we all hope to find at least some, if not loose, connections between the two.  Let’s take a look at the current scene.  A trade deal with China may be hitting some roadblocks, but it appears that at some point there will be a resolution, which is fully priced into the market, so we can take that off the list.  The Fed, which in my opinion, is the single architect of this past year’s march to new highs.  They have made it quite clear that they are done lowering rates, so we can take that off the list as well.  That leaves corporate earnings and the global economy.  Earnings season is just about over and the results were largely as expected:  lots of exceeding low bars with an overall deceleration of earnings growth.  Not good but not devastating.  On the global economy, the US economy is limping along with the help of confident consumers, who are racking up record amounts of credit to keep retail sales viable.  On the corporate side, global PMI’s, which are the best gauge of non-consumer sentiment, continue to trend down, painting a picture of tough months ahead.  To be clear, the US economy is weak but still moving forward, but is that enough to push markets to new highs?  It is not uncommon for markets to get out of sync with the economy but ultimately the discrepancies resolve themselves.  If the markets are right, the economy will turn around in 2020 and begin to gain momentum again.  If the economy is right, 2020 could be a tough year for stocks.

 

2. Amongst friends.  Yesterday, Fed Chairman Jerome Powell visited the President at the Whitehouse.  Surely that was an uncomfortable meeting for at least one of the guests.  President Trump has sharply criticized the Fed and Chairman Powell himself.  He has showered the central bank with rhetorical insults in an attempt to sway them to lower rates even further.  In fact the President has even called for negative interest rates.  Though this practice of  jawboning seems like it would be illegal, it is actually not and is quite common amongst both Republican and Democratic administrations.  Clearly, President Trump has a unique way of expressing his thoughts on the matter, but he is not much different from many of his predecessors.  Lower interest rates are always good and welcomed by political leaders… except during times of high inflation.  We know why the Presdient would like rates to be lower.  Why then is the Fed so reluctant to fulfill his wishes?  The Federal Reserve has a dual mandate for monetary policy:  keep inflation under control and ensure a robust labor market.  With unemployment right near all time lows and inflation comfortably below the Fed’s 2% target it would appear that they are doing a good job as custodians of the US Economy.  We all know that nothing good lasts forever, though it may appear that way in the past few years.  If things go sideways with the economy, the frontline defense is always monetary policy and at this point the Fed is left with interest rates of 1.75%, just a small amount of room to maneuver.  So one would expect the Fed to carefully protect and ration its last bit of ammunition.  The data-dependent Fed must politely ignore the public attacks… as they always have.

 

-  Housing Starts are expected to have grown by +5.1% month over month compared to last month’s decline of -9.4%.

-  Building Permits are expected to have pulled back by -0.4% compared to last month’s -2.4% contraction.

- New York Fed President John Williams will speak today.

- This morning Home Depot beat and Kohl’s missed earnings estimates.  We will hear from TJX, Lowe’s, and Target before the bell.  After the bell earnings include Sonos, L Brands, and Nuance.