NFTRH; The Post-FOMC Landscape

It appears the other side of Trump mania has shown its hand.  Think about this for a moment; the Federal Reserve is actually adjusting policy based on a political outcome and the resulting anticipation of coming fiscal policy easing, as opposed to the monetary easing that had been employed under the previous administration, which was fiscally tight against the economy.

Without playing politics, we’ll just note that taxes and other economic burdens (regulation, healthcare costs, etc.) were relatively high and now they are projected to be brought down.  Into that breach goes the Fed, with a hint about faster than expected monetary tightening.  They, like the markets post-November 8, appear to be in reactionary mode.  We had noted that the Fed was likely to raise 1/4 point and how markets looked if they did not go asymmetrical.  Well, I’d call yesterday ‘asymmetrical lite’, as the Fed outlined a change to assumptions and expectations.

Here I recall an old notion that the Fed will bias toward slow or no hikes under an existing administration but then get the dirty work done early in a new admin with a wink-wink, nudge-nudge to the new president that they’ll have his back later in the term.  With Trump being an outsider brimming with big (fiscal) ideas, the Fed seems to be working to this playbook.

The upshot is that the Fed is doing what they should be doing (actually, as often bemoaned I think they should have done it a lot sooner, but for the politics involved).  What’s more, if expectations for a Trump presidency go approximately as anticipated I expect the Fed to firm up in its role as monetary tightener against a fiscally relieved atmosphere.  I actually respect their stance, which feels more normal than it has in 8 years.  More normal, not nearly normal (whatever that is anymore).

Looking around the landscape…

  • US Stocks took a small hit and as it stands now, need not take a big negative reaction to the policy tightening.  I would be careful of areas that export heavily though, as the already elevated US dollar is likely to be firm until we start seeing signs of economic easing.  So far, we have the most preliminary of signals from the canary in a coal mine, the cyclical Semiconductor Equipment sector; and even that is not showing pronounced weakness but rather, just an orderly deceleration over 3 months (November’s data was due to be released yesterday, but has been delayed).  We have reviewed in the past how previous rate hike cycles can go against a firm economy and bullish stock market for an extended period before asset markets finally crack (and unfortunately, when they do crack the fallout is usually a crash in the modern era of debt leveraged for asset appreciation).
  • Treasury Bonds… ouch, but I am staying on the contrarian trade for now as a balance against stocks.  At least they pay income along the way.  The problem here is that a bounce has looked likely, sentiment-wise, but the Fed made an adjustment to its outlook yesterday and that is being factored in.
  • Global Stocks remain a mixed bag, with Japan being a standout on the hammered Yen.  But DXJ for example, has hit the NFTRH+ measured target this week and will go against the Yen.  On the latter, I see it as the same type of contrary play as T bonds above.  Japanese stocks look too risky to me now.  The Euro also got hit and maybe European stocks are worth a look.  But I will continue to favor the US stock market.  EMs are still relatively suspect.  Russia took a much needed haircut.  I took a profit on Russia by the way, while taking a loss on the A-Shares China trade as ASHR dropped further below my tolerance point per the previous note.  On balance, I remain more interested in certain areas of the US stock market than global markets, but weak currency economies that export to the US could show pockets of strength.
  • Commodities, like stocks, can climb during a rate hike cycle as long as the economy remains firm.  The Fed is apparently trying to head off projected inflationary pressures based on fiscal easing to come.  If that genie gets out of his bottle it sounds like a tough challenge for the Fed to find just the right level to set the regulator so that it does not get out of control.  But so far, they have made (in my opinion) the right move.  Energy took a hit but still looks good, generally.  Materials and resources as well, now that they are getting a haircut.  We’ll evaluate week by week.
  • Precious Metals… ignominy thy name is gold, silver and the miners.  But it is important to realize that the backdrop has shifted.  The Fed is reacting as a regulator on monetary policy due to projections of fiscal policy.  As we have noted, the economy is fine and economic signals firm (pending the SEMI data that most people do not even know exist).  I’ll simply repeat that it pays not to obsess on this all-too-obsessed upon sector until the time is right.  So much for the bounce scenario that I myself nursed along.  The sector needs to do some testing now and would-be bulls should be patient with it.  The positive comparison is that in 1999-2000 the sector bottomed during a time when things appeared as good as they get in the economy and stock markets.  Various ‘cycle guys’ have been projecting an important low in gold and so far it is elusive.  But that does not mean it is not coming.  Patience, pending incoming data across the macro.

See you Sunday with NFTRH 426, which may be somewhat shorter than usual because I am going to NYC to retrieve daughter #1 to bring her home for the holidays.