“Help me make it through the night…”
Kris Kristofferson wrote this country classic around half a century ago… the hit record performance was by Sammi Smith, although it’s been covered many times, including by the powerhouse duo of Dolly Parton and Willie Nelson.
The song reference for this month’s missive refers to Federal Reserve Chairman Jay Powell’s statements following the first interest rate cut since 2008. Wall Street totally anticipated this move in one of the most telegraphed policy decisions in recent history. Rates were lowered by ¼ point, and the Fed’s program of quantitative tightening signaled an end. Even so, immediately following comments by Chairman Powell, equities shed over 1% of their value. Why? Perhaps folks wanted a ½% slice… maybe Powell’s failure to rule out a “one and done” rate cut scenario is the reason. It simply could have been his less than dovish language. Per usual, traders have over-reacted to the news in a temporary atmosphere of massive volatility. . That being said, where do we go from here?
I wrote last month that I believed that the signals frankly didn’t warrant this cut in the first place, at least not domestically. The stock market continued to reach new highs with the Dow hitting the 27,000 level, S&P 500 exceeding the 3,000 mark, and NASDAQ eclipsing 8,000. This cycle of corporate earnings has been solid, particularly with regard to the consumer sector. Starbucks and Apple were just two of the many stocks that did famously in the discretionary spending arena. Although there’s been plenty of rhetoric, nothing has really changed on the world stage other than Boris Johnson being named UK Prime Minister. His ascendance perhaps brings Brexit closer to the table in the fall. Tensions in the Middle East have simmered, and inflation remains tame.
Why then did the Fed decide to lower rates? Even though the Fed should not be swayed by political pressure, it’s obvious that President Trump’s haranguing of Chairman Powell to ease monetary policy had an effect. The Fed may be reacting to overall world conditions that seem to be slowing in the manufacturing sector. Also, with many developed countries’ sovereign debt yielding negative rates (i.e. Germany, Japan), perhaps we need to keep pace with their race to the bottom. My feeling is that America is still by far the proverbial tallest economic midget in the room and that the easing will have little salubrious effect.
Let’s look at some facts courtesy of CNBC. At the time of the last rate cut eleven years ago, the Dow Jones Industrial Average was roughly half of its level in summer 2019. Ten-year Treasury rates were at around 5% instead of 2%. Oil often exceeded $100/barrel for crude instead of today’s less than $60 price. These are just a few metrics that show that the circumstances underlying today’s action are nowhere remotely similar to the chaotic meltdown of 2008. I’ve never been afraid to take a contrary stance, and I’m certainly not going to be so today. What if things truly go south? Cutting today means less firepower for any future problems. I simply don’t get it.
All venting aside, 2019 continues to be a good year for almost all asset classes. Equities have performed admirably thus far, with fixed income and gold being positive as well. I see the stock market as relatively fairly valued… not cheap by any means, but not expensive vis-à-vis projected future corporate earnings. The angst over monetary policy could be an excuse to take some profits off the table, but I remain constructive. It’s difficult to think otherwise when the ten-year Treasury yield is at the 2% level. There are many stocks that pay more than that rate in dividends, and companies continue to increase their payouts.
Lynne and I are taking a much-anticipated anniversary vacation to the British Isles on Friday. RC, Kelley, and Christie are on hand to answer any questions that you might have. I’ll be available via e-mail in case I’m needed… it will be nice to get away.
Thanks as always for your continued trust and support. I’ll have a report from “across the pond” next month… take care…
|The opinions expressed in this letter are those of William Schiffman and should not be construed as specific investment advice. All information is believed to be from reliable sources; however, no representation is made to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Diversification cannot assure a profit or guarantee against a loss. The S&P 500 Index is a broad based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general. Indices are unmanaged and do not incur fees. One cannot directly invest in an index.|
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