If you are still buying stocks, you are fighting the Fed and fighting the Fed can be an awfully difficult battle.
That's how come stocks went down today and they could continue to go down, because Fed Chair Jay Powell isn't about appeasing stock buyers, he's about slowing growth so that we don't have a lot of inflation.
I sat there like many people and listened to how Powell talked, and it was quite clear that he says we need more rate hikes.
There are a lot of mistaken judgments being made all over the place today about what Powell's quarter-point and then two-quarter point moves mean for the stock market. Mind you, I said the stock market, my bailiwick. Let others opine on what the Fed should or shouldn't do in some sort of ethereal world, I want to tell what's going to happen to your portfolio and how to proceed now that we have had the bump up by a quarter of a point and a couple more bumps ahead.
First, I heard a lot of people who said that this was a perfect balance, a well-thought-out plan that's good for stocks, a perfect threading of the needle. What planet are these people on? Remember in October, when the economy was just peaking, Powell said that things were so strong that we needed one hike this year and three next year?
Now, with inflation much more subdued than it was then and the economy obviously slowing on so many fronts, all he did was cut out plans for one of the three hikes next year. He didn't drop the idea of more rate hikes with a "one and wait" strategy. He made it clear that there is still too much growth in the economy. There's still too many jobs and too few people to fill them. Sure, he sopped that labor participation could be higher than he thought. But that's not something he is banking on. He wants a slower economy than we have. That hurts Main Street. That's his plan. Do not deny it and understand that his plan will not help earnings for publicly traded companies either.
Second, we didn't go down a thousand Dow points, I think because we are so oversold, the most since the bottom in the February selloff. Lots of people have already sold stocks because they fear both Jay Powell's rate hikes and the weaker economic activity they have engendered as well as the tariff issues that President Trump has engaged in. You cannot blame anyone for selling. The rate of return from risk-free assets, like CDs, just keeps going higher and you can earn three and a half percent for five years without doing anything. What can I say? That's a lot more satisfying than being in this treacherous market. It's only the fact that so many people have bailed and so many people are negative that we are cushioned from a huge fall.
Three, people are saying that Powell is more data dependent then before this meeting. That's just untrue if you parse his words. He is saying that inflation is more subdued, but he has to raise rates. He is saying that the stock market is being volatile, but he has to raise rates. He is saying that those who are worried about a slowing economy should recognize how strong employment is. He is saying that people like me who are very concerned about job losses because of slowdowns in construction, in housing, in oil and gas, in manufacturing, in autos and now Christmas retail sales, don't really know what they are doing and things are better than I think. He is saying that his homework is better than my homework. Sorry, we got the grades. If he were right, this incredibly oversold market would have at least bounced higher. I hope for Jay's sake that things are as strong as they say. But, sadly, I think he is very wrong.
Four, President Trump picked a man who is very independent to be the Federal Reserve chair. That's terrific for the institution of the Federal Reserve. It is not so terrific for the economy and the president has a right to worry about a possible recession next year because I read Powell saying that perhaps we have to take rates higher to slow down hiring. He will be an effective counter to the president's desire to create more jobs and have the economy do better.
Other than the myriad prosecutors and most of the heads of state around the globe he is the president's worst nightmare, a doctrinaire old-fashioned Republican who is as confident in the economy as he was back at the beginning of October but he is mindful that others think differently so you have to take the views of others into account.
It's funny, brutal and ironic but the woman President Trump deposed as head of the Fed, Janet Yellen, would have reached very much the opposite conclusion with this evidence of cross currents that Powell cited.
I believe she would have said it's time for the Fed to pause because of those cross currents, and given the more subdued inflation, including the endless collapse of oil, it won't hurt to wait and see. Powell says he sees moderating growth in the future so let's hike twice and not three times. Yellen, who I know will not criticize Powell, would have been sure not to trap herself by being a lot more prudent and a lot less reckless. Oh, and newsflash, he may not sound reckless, he may sound reasoned, but the only people who should be really happy about his statement are the rich whose wealth will be preserved. The working person who is finally getting to make some more money after a lost decade of wage growth, got hammered today right along with his 401(k). I just hope that person doesn't own a house because that's going down in value because of this, too. Again, the rich don't have to worry because you only need to get rich once as we said at Goldman Sachs. But the not so rich? Sorry. In Jay Powell's dogmatic world you're making too much money as it is!
Five, here's what stocks typically do for the next few days: On day one of this new leg down, all stocks go down. In day two, the stocks that do better in a recession do well as long rates have plummeted to 2.7%, signaling a severe slowdown. I like Clorox (CLX) , PepsiCo (PEP) and Procter & Gamble (PG) as well as the utilities.
On day three the classic growth technology stocks rally, the ones that don't need a strong economy to grow earnings because Jay Powell just assured us we won't have one.
Finally, I am disappointed in Mr. Powell. Because he was so bullish about world growth at the beginning of October he couldn't say the obvious, that he was too bullish and now he has to be more concerned about the downside than the upside even as employment is strong. I pondered this morning that President Trump would like to call Jay Powell to the top floor and say, you're fired. But guess what? You know who more likely got fired today? President Trump, because he'll be fighting one heck of a Powell economic headwind if the prosecutors let up and he can run for president again.