Lawmakers don’t want to be upstaged by the Fed

Stocks took a proper drubbing yesterday as investors digested the mixed messages from the Fed. Higher treasury yields inflicted pain across all interest-sensitive sectors.

Dis-interested? Let’s go over this once again, for good measure. The Fed is… confused. ‍♀️‍♂️ Members just can’t understand why the economy is doing so well despite their best efforts to derail it and scare the living daylights out of us. I am sure that none of them takes pleasure in raising interest rates, as they are, after all sensitive to them as well. I am also sure that they are probably not able to stare their kids and grandkids in the eye after derailing everyone’s savings aspirations over the past 2 years. But a job is a job, and inflation, though slightly subdued, still remains, and if you think that it won’t come back, all you have to do is look back to the late 1970s to learn that it can. Hoping to avoid that, the Fed, which is deeply steeped in history, is playing it safe for now and keeping the prize chest locked for now. In finance talk that means interest rates will remain here, or a touch higher, and they will stay here, or a touch lower through the end of NEXT year. We know this by observing the infamous Dotplot. It shows that a majority of FOMC members expect Fed Funds to be +25 basis points higher by the end of the year. For some color, none of them thinks it will be higher than that and a respectable minority thinks that rates will end the year right here. Looking at the yearend dots for 2024, FOMC members think on average, that Fed Funds will wrap up the year -25 basis points lower than where they are right now, with the individual forecasts neatly dispersed around the median. Of course, there are many ways to get there, but, for the most part, monetary conditions don’t appear that different next year from this FRUSTRATING year… assuming that Fed members are correct. AND FOR THE RECORD, they have been wrong in their forecasting for the past 5 years. If you don’t believe me, I will tell you that the Dotplot from June 2021 showed FOMC members projecting the Fed Funds rate to be around 0.65% by the end of this year. In case you missed it, Fed Funds are now at 5.5%... so, one can say the FOMC members were… wrong.

All that said, we are here now, and the market must digest all of what IT thinks and reconcile it with what the Fed so vehemently wants it to think. The numbers don’t lie, however. The economy is healthy for now. As long as it remains healthy, the Fed is going to keep the pressure on. Of course, if inflation goes back to +2%, the Fed may also let up. If neither of these changes materialize, neither will the Fed and its policy. Longer maturity bond yields will continue to remain elevated and perhaps ooze higher on good economic data… AS IT ALWAYS HAS. Traditional interest rate sensitive stock sectors will continue to be under pressure with competition from bonds. Those would be Utilities and Real Estate. Non-traditional interest rates sensitive sectors will also remain under pressure. The one that comes to mind first is everyone’s favorite Tech sector, which only recently was branded “interest rate sensitive”, not because of competing yields, but because of a very technical financial equation only known to a minority of business school undergraduates, a majority of Finance MBAs, and every Finance PhD. Get the picture. That, my friends, is how we got to where we are this morning. The market is reconciling. Next up for consideration is the legislative branch of the US Government which is now doing its best to help the cause by flirting with a Government shutdown. While default is off the table, a shutdown is very much on the table, and while the market has survived many in the past several decades, those shutdowns do take their toll on economic growth. Remind me again, is economic growth good for stocks, or bad? Now I am confused.

STOCKS ON THE MOVE RIGHT NOW

Microsoft Corp (MSFT) shares are higher by a marginal +0.26% in the premarket after it appears that the company is close to getting UK’s approval for its acquisition of Activision Blizzard (ATVI). Dividend yield: 0.93%. Potential average analyst target upside: +23.0%.

Charter Communications Inc (CHTR) shares are higher by +1.83% after Wells Fargo raised the company to OVERWEIGHT from EQUALWEIGHT and raised its price target to $550 from $450. The analyst believes that the company’s growth will pick up as result of mobile, rural growth, and video accelerate. Potential average analyst target upside: +11.4%.

YESTERDAY’S MARKETS

NEXT UP

• S&P Global Flash Manufacturing PMI (Sept) may have risen to 48.2 from 47.9.
• S&P Global Flash Services PMI (Sept) is expected to have inched higher to 50.7 from 50.5.
• Fed speak is starting up again. We will hear from Cook, Daly, and Kashkari today.
• Next week: we will get more housing data, regional Fed reports, Durable Goods Orders, Consumer Confidence, GDP, Personal Income, Personal Spending, PCE Deflator, and University of Michigan Sentiment. Check back next week for calendars and details.