What did they expect?
The easy guess would be less than they got. At surface level, growth stocks sold off and did so rather harshly. They were certainly not alone, though.
While the Information Technology sector took the worst beating, led lower by hardware specifically, and software and the semis also struggled, there was an odd mix at the top of the daily performance tables. Energy easily finished the day on top as crude prices ran higher. The Financials finally found some support. Aerospace and Defense helped the airlines push the Industrials higher. Stocks had been trading broadly higher across the board though, and those gains accelerated in between the Fed's policy statement and the start of the press conference a half hour later. That was all there would be. Equities would sell off hard over the final 90 minutes.
The Nasdaq Composite took a beating of 1.25% for the day, closing at the bottom of its daily range, and once again pressuring its own 50-day simple moving average. The S&P 500 (-0.5%) also closed at the bottom of its daily trading range.
There was something different about this day, though from an equity perspective, or maybe it was a mirror-type reflection.
While mega-cap tech took one on the nose, most of the marketplace actually did a lot better. Breadth was actually quite positive. At the NYSE, winners beat losers decisively, while advancing volume literally trounced declining volume by close to three to one. This came on rising trading volume in aggregate. Without seeing headline performance, one would have thought the day quite bullish.
How about up at the Nasdaq? I mean we already mentioned that the Composite gave up 1.25%. The Nasdaq 100 was even worse -- down 1.7%, as that index carries no financial names among membership. Even across the Nasdaq, winners easily beat losers, while advancing volume also handily bested declining volume. Trading volume declined up at Times Square, however. Is that a negative because most Nasdaq-listed names rallied, or is the declining volume a mild positive because the headline averages got a bit ugly? You tell me.
We have seen this movie a few times now. Markets rally for a couple of days into an FOMC policy meeting, and then sell off in response to the results of that meeting. I was not disappointed in the Fed on Wednesday afternoon. It appears that at least enough folks were. I don't know. What did they expect?
The Statement
It's hard to get more dovish than the Fed's statement. Is this the ultimate threat? That the FOMC can not possibly get more dovish? I mean they could, if say they were to target negative short-term medium-term rates. They could if they simply grow the quantitative easing program to the point of overtly monetizing the national debt. The Fed has been doing that, in a way, for most of the past 12 years or so. Then again, is that not what the suppression of interest rates, while increasing the monetary base really all about, intended or not?
The official statement is short and succinct. We can credit Jerome Powell for this, as it has been his way, and the way of the committee since day one. There are several sentences in this statement that stand out. Perhaps the most effective sentence for me is the first sentence in the third paragraph. "The path of the economy will depend significantly on the course of the virus." As I have written since early on in this pandemic, the virus is still in charge. The awful truth. What the virus has done, from the Fed's perspective, is suppress economic activity. That means to us that labor markets have been badly damaged, and consumer demand blunted. Inflation? Muted by this reduced demand and lower energy prices.
Most importantly, on rates, the FOMC expresses that, "it will be appropriate to maintain this target range (Fed Funds Rate of 0% to 0.25%) until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time."
Then, later in the statement, comes this that I did not expect prior to the election. "over coming months, the Federal Reserve will increase its holdings of Treasury securities and agency mortgage-backed securities at least at the current pace to sustain smooth market functioning and help foster accommodative financial conditions."
Many are taking this as a denial of increased quantitative easing. That's not what I see. I see the committee telling us that the current pace ($80 billion in Treasuries, $40 billion in MBS per month) is the floor, and that the pace is adjustable to the upside. The statement is bluntly telling us (my take) that this Fed will buy what the federal government needs to sell and pay well above market value to hold that debt. The Fed is also willing to play some ball with inflation if such inflation might be successfully provoked as trade-off for improved labor markets, economic growth, and a general easing in the ability to service debt over a number of years.
Messaging
My thoughts? Glad you asked. One must look at the quarterly economic projections to understand what I think.
In June, the FOMC saw GDP for 2020 at -6.5%. Now, they see GDP at -3.7%. In June, the FOMC saw the unemployment rate for 2020 at 9.3%. They now see unemployment at 7.6%. In June, the Fed saw core inflation for 2020 at 1.0%. They now see this at 1.5%. In other words, across every metric, this FOMC has had to significantly improve their expectations just for this year from what they expected just three months ago. This means that surely they just do not know. That is not condemnation. I do not know either.
Then we look out over the next few years. The FOMC sees GDP rising to +2.5% by 2023. They see the unemployment rate shrinking to 4.0% by 2023. They see core inflation crawling up to 2.0% by then as well. Yet, the FOMC sees the fed funds rate at 0.1% for 2020, 2021, 2022, and 2023.
They are committed to keeping short-term rates at or close to zero for years, even if the economy returns basically to pre-pandemic trends. The messages that the FOMC is trying to send are such:
To the Public: We will keep money loose today, tomorrow, and the day after that. Know this. Understand this. This is the environment provided.
To the Federal Government: We have your back. Regardless of the outcome this November. The pipes of liquidity will be greased, and what you need to borrow, we will lend it to you somewhere between no and little cost.
To Investors: We kind of, sort of have your back. If you hold equity. If you hold physical assets. If you hold paper? That gets us to yield curve control, which will be a lesson for another day.
Reality
The reality is that if we don't know, and the Fed does not know, then nobody knows. What I do know is this: If by 2022, GDP is growing at 3%, unemployment is running well below 5%, and core inflation is close to 2%, then no way in heck will the Fed be able to keep borrowing costs at close to nothing. If they do, core inflation will be well above target, and that brings back the possibility of having to act in self defense.
At least part of the market's negative reaction may be tied to two factors. One, the FOMC at no point in the economic projections expresses faith in their ability to reach inflation targets. While this may be understandable given the central bank's constant inability over many years to reach and then sustain inflation at target, the lack of confidence may have been key to certain algorithms that respond to such things. Two, the Fed is forced to dance alone. Powell tells the media flat out, "I certainly would not say that we're out of ammo, not at all."
That said, the man is no fool. He saw the Census Bureau's numbers for consumer prices in August. Retail sales increased at the headline and at the core, but they fell short of expectations. In fact, the control group (which is tailored to try to emulate consumer behaviors, so it's a "more core" core number) actually did print in contraction for the month. Even non-store retailers failed to show growth in August. Let's keep in mind that the extra $600 federal stipend that the jobless (approximately 25 million Americans) who had successfully applied for state-level unemployment benefits were receiving did run dry as of the end of July. Let's not forget that the $1,200 stimulus checks ran dry a long time ago, and rumors of a second round amounted to nothing.
How must Powell and the entire FOMC feel?
Here they are still doing the heavy lifting. Ever more expected, even hoped for on the monetary side. Still, Congress fiddles while Rome burns.
I think consumer behaviors for the month of August might just be the tip of the iceberg. For at least the first few weeks of the month, there was a broad belief that the two sides would compromise in order to provide additional support to households. It now appears that the American household has become one more political football. Such a shame. A shame that neither side can show the kind of heart that might win them an election instead of trying to make the other side lose that election.
The Blizzard
The incredible Snowflake (SNOW) IPO has come and gone. The company raised $3.4 billion on the sale of 28 million shares at a price of $120. The stock closed at $253.93 after trading as high as $319, and as low as $231.11 in the regular trading session at the NYSE. That's right, a range of nearly $88 with a low print more than $111 above where the deal had been priced. Oh, by the way, trading volume amounted to 36.2 million shares. Keep in mind that I just told you that the entire float is only 28 million shares.
Much was made of the investments made by Berkshire Hathaway (BRK.A) (BRK.B) , and Salesforce (CRM) . I heard it said on the radio last night that Berkshire made a quick $1 billion on Wednesday. The shares, A or B both saw a 0.3% increase for the day. Salesforce actually gave up 0.4%, which I guess was solid outperformance, as the Dow Jones U.S. Software Index lost 1.7% for the day. Huzzah.
Completely overshadowed by SNOW was the smaller (SNOW was the largest software-related IPO ever) offering of 11.6 million shares of JFrog (FROG) , also a software name. FROG had been priced at $44, and closed at $64.79 (not far from the day's low) after having traded as high as $77. Not a reason for the headline market selloff, but one must realize that capital allocation is set in stone at many firms and not readily adjusted on a whim. If managers are compelled to gain exposure to SNOW, or to FROG, then something else must be sold. This could have very well have been an accelerant to the downside on Wednesday for software/cloud type names. and given the outrageous performance of the two, the industry/sector might not find its footing overnight.
What The?
On Wednesday evening, Bloomberg News reported that the proposed deal between TikTok parent ByteDance and Oracle (ORCL) would still pose national security risks. That deal supposedly permits Oracle to review source codes in order to make sure that there are no secret backdoors that would allow third parties ro access data.
Is Walmart (WMT) still involved? We don't know. Microsoft (MSFT) apparently has no interest in merely being a hall monitor.
Supposedly a number of Senate Republicans are opposed to the Oracle deal in the way it is currently outlined, and President Trump will be briefed on the matter today (Thursday). Starting to sound silly? We don't know enough to know that, but the thought has crossed my mind.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 835K, Last 884K.
08:30 - Continuing Jobless Claims (Weekly): Last 13.385M.
08:30 - Housing Starts (Aug): Expecting 1.47M, Last 1.496M SAAR.
08:30 - Building Permits (Aug): Expecting 1.52M, Last 1.483M SAAR.
08:30 - Philadelphia Fed Manufacturing Index (Sept): Expecting 15.5, Last 17.2.
10:30 - Natural Gas Inventories (Weekly): Last +70B cf.
The Fed (All Times Eastern)
No Public Appearances Scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (CMD) (-0.01)
After the Close: (SCHL) (-1.74)
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