You have to root for the Fed to be wrong to like most of the stocks in this market. You have to bet that they raise rates in December and then they say, you know what, we may be winning this inflation war so now we will see what happens. If they do that you will see a huge rally.
The problem is, will it be too painful to stick around while you wait for the Fed to change course and stop saying that it needs three more rate hikes next year? Who in heck has a crystal ball that perfect, especially when we have had punk retail sales and a weaker CPI? Who is that good to think that all the data is going to stay so strong that the Fed has to stay vigilant until 2020? Who is willing to say that maybe it has to overshoot and raise more than it should because things are so hot?
I don't know anyone who, rationally, would want to set himself up for failure except Fed chair Jay Powell and the rest of his minions, all of which, I am sure are willing to come on our air and laugh at my view. It is amazing to me that they are willing to challenge someone who said they know nothing and they laughed - right onto the 2007 precipice. But then again I am a TV guy, what the heck do I know, even as I have been at this a little longer than pretty much everyone on the Fed. Maybe they know something because they are doctrinaire and I am flexible and data dependent? Good luck with that.
Simple. Just as I feared, the buzz on the trading floors all over the country is pretty simple: we are late in the cycle of economic expansion.
That's code for "we are decelerating and this is about as good as it gets."
Take Bank of America (BAC) . I loved the quarter. They are expanding their deposit base incredibly fast. Listen to some of these numbers: average deposit balances rose $45 billion or 4% to $1.3 trillion dollars. Net interest income increased $709 million or 6% to $11.9 billion, reflecting benefits from higher interest rates as well as loan and deposit growth. A quarter of deposit transactions were performed via their terrific mobile app. And, most important, net income rose 32% to $7.2 billion and diluted earnings per share were up 43% to $22.8 billion. Credit losses are incredibly low and the stocks sells at 11 times earnings!
Yet the stock is down, and at one point down badly. Why? Because the Fed is going to slow the economy down to where the additional money they make on your balances won't make up for a mandated slowdown in loan demand.
Now I am sure there will be people, Fed apologists, who say there won't be a slowdown. That's how strong the economy is.
I say "that's how strong the economy was." Look, if the bank stocks ran on their quarters - all of which, for the record except (PNC) - were very good, then I might feel differently. But it would be highly unusual if the reactions were all wrong. In fact, the most domestic bank, PNC, got crushed but the most international bank, Citigroup (C) , saw its stock go up. Not a coincidence.
Now I respect the action today. In fact I like it. We are the most oversold we have been since the conclusion of the February selloff. That selloff was accentuated by all of that VIX nuttiness, you know, the trading of those ridiculous instruments designed to profit when the market is placid. It's hard to even describe that as investing.
I threw a boot camp teach-in this weekend, it was terrific, and we heard so many positive ideas, many of which are down so much it is staggering. We heard positive things about everything from Canopy Growth (CGC) , the pot stock that's up ahead of Canadian legal repeal on Wednesday, to Facebook (FB) of all things, which hasn't lost much advertising and is doing incredibly well on Instagram.
I like that the market took the news of the bankruptcy of Sears (SHLD) in stride. It could have been much more dire even as I know the company had been in decline for ages. Home Depot's (HD) stock went down on it, but Whirlpool's (WHR) stock went up even as you would think a brand so closely linked with Sears would get hurt. But Stanley Black & Decker (SWK) was dinged.
Oil did NOT spike despite the stern words the president had for Saudi Arabia over the mysterious disappearance of a Saudi dissident journalist.
The president threatened more tariffs on China, the Chinese stock market went down again and yet it didn't crush our market.
All of these should have brought the stock market down hard but couldn't because we were oversold.
However, the Nasdaq remains an area rife with selling which makes sense given that it is still up 8% for the year. Any selloff of this magnitude would normally wipe out that whole gain. To me it is going to get a bit of a haircut especially because Goldman Sachs (GS) said there's concern about Apple's (AAPL) Chinese sales slowing. Adobe (ADBE) and Nvidia (NVDA) got shelled again as worries about slowdowns perpetrated those stocks.
But there's bad news here. The best performers today were stocks you would buy if you believe that we are late in the cycle. My number one fear when I see this market is the rally in Clorox (CLX) . I like that stock very much because management is doing such a good job to navigate the slowing supermarket story. That's all well and good. When I see the stock up big though, that says, I am going to be right and the Fed is making it so we are really late in the cycle.
Okay, so Clorox is too good? Procter & Gamble's (PG) been giving you anemic growth, yet the stock's up a point. Kimberly-Clark (KMB) , which I think could miss the quarter, is up almost two bucks. Will the Fed notice any of these patterns?
I think, like in 1998 and like in 2007, the Fed has made a judgment that its job is not to prop up stocks. That's literally how they look at the stock market.
For heaven's sakes, that is the ultimate straw man. We aren't even remotely suggesting that the Fed should do anything to help the stock market. What we want to respect is what the stock market is saying and right now it is saying that the Fed should be careful as its work may be much further along than it realizes. When you have quality banks like JP Morgan (JPM) openly telling you that it expects housing to decline 10% in 2019, how can you not say we are in late cycle?
Again, given the big gain Friday I find the action constructive. However, if I am right about the chatter that we are late in the cycle, the narrative is going to make the reaction to so many stocks be like what we saw with the banks: disappointment in the face of dramatically better earnings.
So why not sell everything now and wait for the Fed to admit that it's wrong? Simple, people have been selling for weeks. You aren't early. And if the Fed changes it view or sends out a Fed head to "clarify" Powell's comments? You will be scrambling to buy stocks at a price much higher than where they are today.