Start With The Good News

Start with the good news.  Stock indexes are hot and they continued to defy gravity yesterday, making more new highs. Good economic data, solid earnings, and more encouraging news from COVID treatment trials all helped power yesterday’s rally.

N O T E W O R T H Y

Joining forces.  Wall Street axioms exist for a reason.  They are easy to remember and they can often accurately explain why something in the market happened in the past.  They can therefore be used to give investors courage in today’s market.  Courage to enter the market in the current climate certainly helps the Bulls’ cause. Yesterday, one can apply two of my favorite Wall Street adages. First: Don’t fight the Fed.  You have heard this one from me several times.  It’s an oldie which reminds investors that the all-powerful US Central bank can move markets with its policy. If the Fed is hawkish, bulls beware. They need not worry these days however as the Fed is dovish to the extreme.  In addition to pledging near-zero interest rates for a long time, they have pumped money into the economy by directly purchasing all types of bonds.  The cash that the Fed uses to buy the bonds injects liquidity into the system while simultaneously supporting bond prices, which also helps keep longer maturity yields low.  Low interest rates are considered good for companies who rely on borrowing to run their businesses smoothly and grow.  For consumers, lower interest rates enable them to leverage more effectively, especially on big ticket items such as homes and cars. All of that is just the tip of the iceberg as the central bank has thrown the kitchen sink at the markets with a pledge that more will be made available if necessary.  Markets have responded positively to dovish Fed behavior in the past as they have through the COVID crisis as well.  Annually, the Fed holds a big symposium on monetary policy in Jackson Hole.  The discussions are aimed at the global banking community with plenty of juicy material for hard-core economists and bankers.  This is not a glamorous event for hedge fund superstars and modern-day, black-turtleneck-wearing industrialists.  Nope, just a bunch of bankers and policy junkies. However, the odd attendance doesn’t make the get-together unimportant.  The Fed sometimes uses the events to float new policy ideas.  Recently, the Fed has been hinting that it may be looking for new ways to “encourage” investors.  I have mentioned those in my writings, most notably NIRP (negative interest rate policy) and YCC (yield curve control).  The former has lots of opposition and appears unlikely while the latter has gotten some airtime amongst policy makers but still does not have a lot of support amongst the FOMC.  That leaves investors guessing what the Fed can do further to achieve its goal of stimulating the economy.  One of the key mandates of the Fed is to control inflation and they have a well-known 2% growth target.  If prices grow faster than that, the Bank is likely to introduce hawkish policy to keep things from overheating.  While inflation might appear to be the last thing they might be worried about right now, it will be an issue in the future as the massive stimulus takes full-effect.  If that does happen and the Fed raises rates… well you know… the music stops.  That said, one of the Fed’s policy tools is forward guidance.  Knowing that their policy affects the markets, they can let investors know what their thoughts are on the future.  As a stark example, the Fed makes it clear that rates will be low for a long time, which is bullish for stocks.  Fed watchers are expecting that the Fed might announce that they are willing to let inflation overshoot their 2% target, which would be bullish for markets.  You know, extended hours at the punch bowl. Chairman Powell will speak at the now-virtual event later this morning and traders will be listening carefully for clues about further stimulus.  A second adage that comes to mind lately is: Don’t fight the tape.  Good news is… well, good news for the market. Economic numbers that beat estimates or show improvement prompts rallies.  News about progress on fighting the pandemic also prompts rallies. Better than expected or growing earnings also prompts stock buying.  With the Fed eager to please and economic numbers that can only get better, it appears that not fighting is the best strategy these days.

THE MARKETS

Stocks rallied yesterday on a good Durable Goods Orders report, better-than-expected earnings, and positive news from a Moderna trial.  The S&P500 rose by +1.02%, the Dow Jones Industrial Average climbed by +0.30%, the Russell 2000 Index slipped by -0.70%, and the Nasdaq Composite Index jumped by +1.73%.  Bonds slipped and 10-year treasury yields were unchanged.

NXT UP

- Chairman Powell is scheduled to speak at 9:10 AM EST at a virtual Jackson Hole get-together.

- Annualized GDP (Q2) is expected to have declined by -32.5%, slightly better than an earlier estimate.

- Initial Jobless Claims (Aug 22) are expected to be 1.0 million compared to last week’s 1.106 million.

- Continuing Jobless Claims (Aug 15) are expected to be 14.4 million, down slightly from last week’s print of 14.844 million.

- Pending Home Sales (July) may have grown by +2.0%, slower than June’s +16.6% reported growth.

- This morning Burlington Stores, Tiffany, and Dollar General beat estimates.  After the bell earnings include Dollar Tree, The Gap, Workday, Dell, VMware, Ulta Beauty, and HP.

daily chartbook 2020-08-27