The Power of Three
September 28, 2018
The market itself took a back seat this week, as most investors’ attention was placed firmly on three events – President Trump at the United Nations, the Federal Reserve interest rate decision and the Brett Kavanaugh confirmation hearing.
Addressing the United Nations, Trump threw down the gauntlet on trade with three key points. First, that the world trade system is in dire need of change. Second, China is violating every principle of which the World Trade Organization is based. And third, China engages in dumping, forced technology transfer and theft of intellectual property.
As the (artificial) deadline to a Canada deal rapidly approaches, it feels like talks are failing. The deadline could be moved, but it’s unlikely that will happen without at least something from Canada.
The biggest news certainly came from the Federal Reserve. This was the first the central bank had ever hiked rates in September and ahead of the holiday shopping season, which is a remarkable testament to the strength of this economy.
The Fed wrapped up its gathering with the following three headlines:
- The economy is growing faster than previously modeled
- Inflation was left unchanged and called tame
- Accommodation will be removed
This also marked the third time this year that the central bank has raised its growth outlook for the economy. As a result, it is looking at more rate hikes – three in 2019 and one in 2020 – to take the fed funds rate to 3.5%. This suggests we are in a Goldilocks economy, although some might interpret this as “it can’t get any better than this.”
I found it interesting that that Powell was asked about tariffs a couple of times. He offered that when all announced tariffs have been added up in the aggregate, they are “relatively small” and therefore it is “hard to see much” impact thus far.
One questioner mentioned Walmart (WMT), Gap (GPS), General Motors (GM) and Macy’s (M) issuing warnings, to which Powell hinted that they already had trouble passing on cost, in part to the Amazon Effect.
When pressed, he acknowledged that “protectionism” would be bad for the American economy, and said that for the moment businesses are expressing a “rising chorus” of concerns about the potential effect on supply chains, material costs and lost markets.
In the end, the key is that investors know Fed Chair Jerome Powell is on their side. I think he gets that and will not derail this economy or market on old tools that were disengaged from the pain and needs of Main Street.
Over the last day and a half, the Kavanaugh hearing has taken over the headlines, and there has also been some drama in the market as the major indices have struggled to hold on to early gains. Yesterday, the Dow Jones Industrial Average rallied 171 points at its peak before drifting into the close. Technicians might point to the fact that the Dow is in a perfect double-top formation, which is typically bearish
While the market is struggling for traction, investors are retreating back to the favorites – Facebook (FB), Alphabet (GOOGL) and Amazon (AMZN), none of which are technically considered tech stocks anymore. Still, we are not seeing a retreat to the sidelines, and that’s a big deal.
That tells me that this rally still has a lot of potential, and there remain plenty of reasons to be bullish right now. The economy is on the move, and while there will continue to be waves out of Washington, it is imperative that we stay invested.
Forget the surveys and the naysayers and follow the money. It’s worked for my subscribers over the months and years and I have no doubt it will continue to work in the future.