Think about where we are going not where we've been. That's been my watchword since I got in this business four decades ago and I am not going away from that thesis now, even when the Fed Chief tells the Senate that the risks to the economy are to the downside.
In fact, I will go one step further, the fact that Jay Powell knows that things are slowing down may be the best thing this market has going for it.
That's how I felt when I heard him say to the Senate, "over the past few months we have seen some crosscurrents and conflicting signals. Financial markets became more volatile toward year end and financial conditions are now less supportive of growth than they were earlier this year. "
The market was getting slugged when Powell said these words and it then rocketed higher, a total u-turn as we gauged once again that Powell was a friend of the bulls, not the enemy.
What determines when the Fed is a friend or a foe? It's when the Fed is more worried about sluggish growth than when it's concerned about a smoking hot economy.
The market doesn't care about irony, the irony that the reason why there are such cross currents and conflicting signals was because the Fed Chief told us at the beginning of October that we did have a smoking hot economy. He made it clear back then that he was going to destroy the economy to save it by raising rates one time in 2018 and three times in 2019.
What he didn't realize at the time was he didn't need to raise rates, he just needed to say he was going to raise rates.
His insistence was so powerful right in the face of the beginning of the decline in the economy that he managed to knock it over all by himself.
Which brings me to the topic that consumes me: the bear market that was December of 2018.
Let's go back and set the scene.
Going into December the Fed was insistent that things were still humming because the Fed chief and his minions really only cared about the employment rate, how many people were being hired.
In retrospect this became a false tell. Even as companies continued to hire, there were so many pockets of weakness, whether they be in retail, or housing, or autos, or freight, or banking and loan demand, that they were so easy to turn into actual chasms because of the Fed chairman's words.
I have often thought about that terrible day before Christmas where it really hit me that we were experiencing one of the worst more compressed bear markets I have ever seen. When Powell decided he was going to restrain growth to the point of overshooting on rates the Dow Jones average stood at 26,828. On that day before Christmas not a creature was stirring except for a bear and the Dow hit 21,764. That's 5000 points worth of pain and it didn't need to happen. It should have been the other way. It should have been going higher.
But every time anyone thought about being bullish they were smote by the Fed's chilling words. They wouldn't recant because employment was just too strong.
Somehow, perhaps because of the incredibly horrendous market, Powell changed his view on everything. Even on employment. He had been worried that there wouldn't be enough slack in the economy and we would experience inflation that would call into question his whole realm. Now? Now this is how he feels: "There's more slack in the labor market because people are coming back in. If people weren't coming back in then the unemployment rate would be substantially lower. But they are or they're staying and so labor force participation is rising in either case and that tells us that there is more room to growth and that certainly has implications for monetary policy."
Translation: Hey, I thought we had to hit the brakes hard when I saw these big labor numbers on the first Friday of every month, I realized, man oh man, did I rely on the wrong thing to make policy because in reality there's weakness where I thought there was strength and our nation isn't the fortress I thought it was. "
Or to put it another way, Powell's words did more than his deeds could ever do: he managed to slow everything down except job growth and he's figured out the power of his words.
Which is why the stock market was able to rally on the news that there are crosscurrents and worries and woes both from overseas and here, so it isn't worth talking about raising rates until we see at least some inflation other than that which is mandated by the minimum wage hikes.
Now, let's go back to my initial premise. I think people are looking at what happened in December and extrapolating that data to now. I think you have to take the other side of the trade.
Let me give you two solid examples. The first is Home Depot (HD) , which reported a number that wasn't that strong today and made people think that the recent weakness in housing data is correct and that housing's falling off a cliff. In reality the market froze because of the rate hikes and now it is unthawing, which makes me bullish not bearish on Home Depot. I will have more later on the company that is so powerful that I call it the despot, but right now the stock's decline is being viewed through the prism of what happened under a tight Fed. We now have a loose Fed.
The second? All day today I heard about how Caterpillar's (CAT) stock, such a visible symbol of industrial might, is a sale, because an analyst at UBS did a double downgrade. That means he went from recommending the stock to telling you to dump it.
Because the analyst believes that the key end markets of Cat - construction, energy and transportation - are peaking and 2019 marks the high water mark of the cycle.
I have to tell you I have a totally different view. First, as we saw, the Fed taketh away. It can also giveth, which is what this benign Powell that we heard today makes me feel that we peaked in October, troughed in December and are now about to go higher. Isn't that what a market that's gone up for nine straight weeks means? Just like when the market started rolling over back in October signaling an imminent stall out, we are now seeing the possibility of a resurgence this spring. Not only that, but it is pretty darned clear that while the Fed spoiled the domestic party, the trade war spoiled the world's economy. Does anyone really think that the economy is peaking in the world IF we end up with a trade deal with the Chinese? I think that one of the must own stocks in that environment would be the double derided Caterpillar as it can surprise to the upside on any agreement.
In the end that's the problem with forecasting as it is done by so many on Wall Street. In October I was screaming holy hell that the Fed better not raise rates into a weakening economy. I wanted the Fed to recognize there were muted inflation pressures and with some of the downside risks, this is a good time to be patient and watch and wait and see how the situation evolves.
The Fed was doing the opposite, hence the decline in the economy forecasted by the stock market. But today Powell says "with muted inflation pressures and with some of the downside risks that we've talked about, this is a good time to be patient and watch and wait and see how the situation evolves."
I think lots of people are bearish because they are looking the gift horse Fed in the mouth. To me, I am grateful and therefore bullish because it's almost never too late for the Fed to switch directions, the one exception being the Great Recession. If you believe that's not going to happen again, as I do, then you want to buy, not sell Caterpillar, you want to buy, not sell Home Depot and you want to buy what you were selling on that dark day before Christmas when the Fed was giving us a lump of coal before it changed its mind and gave us a bull market instead.