Farewell, Janet

Posted: Feb 01, 2018 9:44 AM
Farewell, Janet

It was the last Federal Open Market Committee (FOMC) gathering under Janet Yellen. While there was no official action, the communique sent the market lower; and then in a flash, all three indices closed in the plus column.

"FOMC Statement Excerpts

Information received since the Federal Open Market Committee met in December indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. Gains in employment, household spending and business fixed investment have been solid, and the unemployment rate has stayed low.

Market-based measures of inflation compensation have increased in recent months but remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong. Inflation on a 12-month basis is expected to move up this year and to stabilize around the Committee's 2 percent objective over the medium term.

In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1-1/4 to 1-1/2 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments."

Goodbye, Goldilocks

Conventional wisdom holds that the Fed will hike rates at their next meeting, and if economic data remains strong, perhaps more than three or four times this year. I think the Street is modeling for two or three hikes; more than three could be seen as a threat, but investors shouldn’t fall into that trap. 

If this economy keeps up this pace, four rate hikes would not only be reasonable but prudent. It sure looks and feels like we’ve gone past the Goldilocks phase of this economy.

  • Wages increased at the fastest pace since 2008
  • Homeownership increased year-over-year for the first time since 2004
  • ADP saw 230,000 jobs created last month

The Fed is in play, but it’s been in play for a while now. We should be fine if they don’t overreact.

January Effect

I was very impressed with the way the market rebounded as all the major indices climbed off the canvas to close higher. If January is the barometer for the rest of the year, 2018 is going to be gangbusters.

The S&P 500 posted its best January since 1998, rallying 5.62%, slightly less than the Dow Jones Industrial Average, which was up 5.79% in January.

The big winner for 2017 has been the NASDAQ, led by its high-flying names (the modern-day Horsemen Stocks of Tech). However, we could see their miraculous rally get interrupted as investors react to earnings that had the Herculean task of justifying recent parabolic moves.

After the close on Wednesday, Microsoft (MSFT) posted earnings that beat the Street by $0.10, and Facebook’s (FB) bottom line came in at $0.26 better than expected. Shares in both names promptly swooned before reversing higher. Today, we get results from Apple (AAPL), Alphabet (GOOGL), and Amazon (AMZN).