On June 19, 2019, the Federal Reserve released minutes that were some of the most eagerly anticipated to date. With the current nature of the economy, investors awaited a decision on rate cuts. And Fed Chairman Jerome Powell faced a dilemma.
If he erred on the side of dovishness, signaling a rate cut, he would seem to be doing the President’s bidding, which erodes the Fed’s credibility as an independent institution.
But if he dug in his heels and stood firm on rates, he risked provoking a market sell-off.
Today, we know the outcome. They left rates unchanged for now, but indicated there would be a 0.5% cut by the end of next year, at the latest. One member of the Federal Open Market Committee actually voted for a rate cut today. And the market jumped higher after the announcement.
It’s proof of just how addicted to stimulus stocks actually are at this point…
Federal Reserve Chairman Powell is slated to deliver his semiannual monetary policy report on July 10 to the House Financial Services Committee. And the next day, July 11, he’s to testify before the Senate Banking Committee. This ought to be something to watch, though I doubt it will shake the markets much. It’ll be the first hearing since last March when President Trump first tried to rebuild the central bank with his loyal supporters.
Federal Reserve Vs. Donald Trump
Unless you’ve been living under a rock, you know the smack Trump has been talking about the Federal Reserve and their interest rate policies. On a typical day, he turns to Twitter to berate the poor job they’ve been doing by not doing his bidding and lowering rates.
Now, I don’t care whether you agree with him or not… the Federal Reserve should be independent. The implications that arise when it’s not are nasty. Think about it. Maybe you like Trump and agree with him here. But would you have liked it had Obama — or perhaps hypothetical future President Alexandria Ocasio-Cortez — decided to use the Fed to advance their respective agendas? Probably not. But when Fed independence erodes, you make those scenarios possible.
Fed Chairman Powell is sticking to his guns and leaving rates unchanged, and I think that’s the right move, regardless of what the market does in response.
Then there’s this:
When Will Economic Expansion End?
This has the marks of desperation. Trump, like the last three presidents before him, needs the Fed to play ball and keep juicing the economy with cheap stimulus.
But I digress…
The point is, I don’t know exactly when economic expansion will end, just that it is going to eventually. And perhaps much sooner than many seem to think. When it does, the picture won’t be so pretty.
For now, the market might go higher over the short-term. That seems to be the trend in place. With that likelihood, I say… why not participate? — and we’re positioned just for that in Peak Profits.
A Rough Year For Value Strategies
The past year hasn’t been kind to small-cap value strategies. In fact, it’s been brutal. Investors are stuck in a dilemma.
They know we’re late in the cycle and that the bull market — which started back in 2009 — probably doesn’t have much further left to run. At the same time, the macro environment overseas looks far scarier than it does in the US, and bond yields are too low to justify a large investment.
With nowhere else to go, investors are piling into a small core of mega-cap stocks and hoping for the best. You know the names: Microsoft (Nasdaq: MSFT), Amazon (Nasdaq: AMZN), Facebook (Nasdaq: FB), et al.
These are the stocks that dominate the major indexes like the S&P 500. Because of this, it gives the impression that “the market” looks great. The party won’t last though. At some point, the music will stop, and this same core of stocks that has pulled the indexes higher will pull them lower.
But that doesn’t mean it has to necessarily has to end for you. With my “FLEX-10 Index,” the party can keep on going, no matter how tired out that bull gets.
But I’m not that worried about that. It’s not the sandbox we play in.