Stock Market Reaction to Fed governor Powell’s Testimony

Fed governor Jerome Powell spoke overnight and the market reaction was interesting to say the least. From the Wall Street Journal:

WASHINGTON—Federal Reserve Chairman Jerome Powell told Congress on Tuesday that strong U.S. economic growth and stable inflation should keep the central bank on track to gradually raise short-term interest rates. But he also highlighted growing risks if the Trump administration’s recent efforts to lower trade barriers result instead in permanently higher tariffs.

The Fed’s rate-setting committee “believes that—for now—the best way forward is to keep gradually raising” rates, he said, in offering a roundly upbeat assessment of the economy at a two-hour hearing before the Senate Banking Committee.

Most Fed officials have signaled they expect the central bank will need to raise rates to a neutral setting that neither spurs nor slows growth. But the addition of the words “for now” underscored how the Fed hasn’t put rates on autopilot and hasn’t resolved key debates over how to proceed once rates reach a neutral level.’

There’s something in that for the bulls and the bears! And the stock market reacted accordingly.

FANG stocks becomes FAG

The NASDAQ, for example, pretty much ignored the whole thing and traded at a new, all-time high. Investors saw Netflix’s big subscriber miss the day before as a good opportunity to ‘buy the dip’ (of course). As Bloomberg writes:

“The crowd who missed out on Netflix’s outperformance in the past, which accounted for a large portion of the market gains year-to-date, seemed to step in this morning thanks to another case of FOMO as many chase their benchmarks,” Kurt Ayling, Susquehanna Financial Group analyst, told Bloomberg. “Up until this morning, it was hard to find an entry point in Netflix,” Ayling added, noting that “those underweight FANG, likely took advantage of a rare ‘buy the dip’ opportunity.”

This sort of stuff never ends well. But you just don’t know when it will end. It appears as though an increasing amount of capital is pouring into tech looking for quick and easy money.

Having said that, the FANG stocks just became the FAGS. Facebook, Apple, and Google (or Alphabet, as it is now known) all made new highs, but Netflix dropped off the pace.

Meanwhile, the rest of the market appeared a little more circumspect. The Dow rose a modest 0.2% and remains in a trading range. The S&P500, on the other hand, increased 0.4% and looks a little healthier. As you can see in the chart below, stocks are now trading at their highest level since the February mini-crash. That’s a positive.

MoneyMorning 18-07-18

Source: Bigcharts
[Click to open new window]

With earnings season set to produce some good results, the S&P500 looks ready to make an attempt on the January highs.

Powell’s comments also saw the US dollar rally. The main victim of that rally was gold. It fell sharply, to below US$1,227. Unless it rallies back above US$1,240 by the end of the week, it looks like I might be wrong about the yellow metal.

It looks ugly on the charts. Last night’s move means it’s broken a long-term upward trend line. But on the other hand, it’s oversold and there is a large short interest in the futures market. Sure, it can get larger. But that’s often a sign prices are close to a bottom.

Let’s see how it responds in the next few days…

The current state of the Aussie stock market

Turning to the Aussie market, and despite a bit of selling over the past few days, it remains in good health. The ASX200 is up strongly since early April and is in a solid upward trend.

I’ve said before I put that down to the expectation that interest rates will remain ultra-low while economic growth continues to be healthy.

However, there is one little question mark over the recent performance that is worth keeping in mind. And that is the lag in the small-caps over the past month or so.

Perhaps it’s nothing. After all, the time frame is very short. But the chart below tells you that in recent weeks, capital has come out of small stocks and gone into larger ones. (The blue line is the Small Ords index, the yellow line is the ASX 200 index).

MoneyMorning 18-07-18

Source: Bigcharts
[Click to open new window]

As I said, it could be nothing. But it’s worth keeping an eye on. Because if sentiment is starting to change, you’ll see it in a preference for bigger, more liquid stocks at the expense of smaller and less liquid ones.

When fund managers want to ‘de-risk’ a portfolio they don’t automatically cash up. They start by selling small-cap winners and putting the proceeds into blue chips.

I’ll check back in on this chart in a few weeks to see how things are tracking.


Greg Canavan,
Editor, Crisis & Opportunity

PS: Aussie finance expert reveals four Aussie stocks he believes could be top performers in 2018. Get your free report now.

Greg Canavan is a Feature Editor at Money Morning and Head of Research at Port Phillip Publishing.

He likes to promote a seemingly weird investment philosophy based on the old adage that ‘ignorance is bliss’.

That is, investing in the Information Age means you have all the information you need at your fingertips. But how useful is this information? Much of it is noise and serves to confuse, rather than inform, investors.

And, through the process of confirmation bias, you tend to read what you already agree with. As a result, you often only think you know that you know what is going on. But, the fact is, you really don’t know. No one does. The world is far too complex to understand.

When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases.

Greg puts this philosophy into action as the Editor of Crisis & Opportunity. As the name suggests, Greg sees opportunity in a crisis. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines traditional valuation techniques with charting analysis.

Read correctly, a chart contains all the information you need. It contains no opinions or emotion. Combine that with traditional stock analysis and you have a robust stock-selection strategy.

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