You combine a Fed Chairman who doesn't want to throw us into a recession, which has suddenly become a big worry, with the absence of negative trade news and you get a pretty wild rally in not two but three oppositional groups, something that's not supposed to be happening and historically almost never does.
How can this be? Let's take a look at the camps so we can figure it out.
First, let's take the camp that says forget what the Fed says about economic growth, the Treasury yield curve is almost inverted and that means a recession must occur.
That's the ideal market for a stock like Johnson & Johnson (JNJ) , which, despite a pre-market downturn, rallied back huge when people realized that a forecast that had been deemed a shadedown by the media, was actually just a currency issue. Oh, and that's also a reminder that you have to wait for the call to trade, because the headline was a total misdirection play.
JNJ gave you incredible pharmaceutical growth and accelerated sales for its medical device business. It has a fantastic balance sheet -- one that I do not believe is at all threatened by recent ovarian cancer cases linked to their talc -- and it's got a top-notch dividend. None of these will be impacted by a recession, especially one that is presumably being caused by worldwide trade wars.
What's the extra-urgency to buying the stock of Johnson and Johnson up huge? I think it came from Fed Chief Jay Powell's Congressional testimony. Powell said that the economy might be "unexpectedly weakening" because of "current discussions over trade policy."
In other words, there's that thesis, the one that says President Trump's tariffs are going to throw us into a recession.
But how about if the economy takes off, which is what the Fed chair also said could happen because interest rates and financial conditions "remain favorable to growth" as well as the strength in the financial system, lower taxes, higher federal spending as well, and a healthy outlook for growth abroad.
Then you have a whole other group of stocks taking off, namely the cyclicals, likes PPG Industries (PPG) and DowDuPont (DWDP) as well as Honeywell (HON) . These are classic stocks that do well when there is no recession in sight. Yes, we have to worry about more tweets that attack China. We have to be concerned about still more tariffs on top of tariffs.
But these stocks go up only when we are getting an economic expansion.
And then you have a third group rallying, the homebuilders, led by national homebuilders D.R. Horton (DHI) and Lennar (LEN) . Why is that important? Because the homebuilders rally when rates are going to be increased only gradually, as the Fed isn't all that concerned about nascent inflation in the system just yet. That's music to the homebuilders' ears given that mortgage rates won't soar, wrecking their businesses. Slow inflation and slower interest rate hikes also help the retailers, and they rallied nicely, too, helped by comments by Powell about how "robust job gains, rising after-tax incomes and optimism among households have lifted consumer spending." That's an incredible confluence of positives beyond the fact that FANG held in despite the decline in the stock of Netflix.
So, what does it all mean? I think it has much to do with a recognition that we have a very thoughtful, very sophisticated Fed chair who is not going to jump to any conclusions to slam the brakes or throw acetylene on the economic fire. A Fed chairman who wants to balance the risks, relies on the data and seeks to do the considered thing is exactly what the market's looking for. He's become a force for the bulls, and that's terrific news for investors of all types and stripes.
