Powell Ambushed & Stocks Tumble

Posted: Feb 28, 2018 11:04 AM
Powell Ambushed & Stocks Tumble

Stocks came out the gate with some vigor on continued signs of consumer strength as department stores rocked, including Dillard’s (DDS), which has been written off by analysts for more than a decade. 

Macy’s (M) also posted strong earnings on expanding profit margins and offered guidance above consensus.

After the close on Tuesday, Etsy, Inc ( ETSY) enjoyed a monster surge on earnings while Square (SQ) and Booking Holdings (BKNG), (formerly Priceline) were indecisive despite beating the Street.

As for the broad market, I view yesterday just like trading after the Federal Open Market Committee (FOMC) meeting’s wrap up. It’s more of a guessing game than true thoughts and an analysis of what was said.

Maybe because Jerome ‘Jay’ Powell is the new kid on the block, he seems to take more abuse than any Fed chair that I can remember since those days of epic clashes between Alan Greenspan and Maxine Waters.  There were still questions about things outside the purview of the Fed, including food assistance programs and the Deferred Action for Childhood Arrivals (DACA) legislation.

But even with all that pushing and pulling of Powell to endorse or condemn certain legislation, there were glimmers of answers that maybe the participants didn’t want to hear. 

Rep. Gwen Moore (D) Wisconsin tried to tie in the distribution of post-tax cut corporate windfalls to income inequality.  After acknowledging the stagnation of middle-class median income, Powell pointed out the essential checklist of what’s needed to keep America out in front: 

  • Educational attainment
  • Skills attainment

The conclusion is that we need a highly educated workforce.

These are the answers to any person or group of people to improve their own economic situation.  The same folks asking disingenuous questions would do well to listen to the answers and start demanding more from themselves and their constituents.

Out of love, we have to push communities on the importance of education and self-improvement, and away from victimhood and self-doubt.  The rest of the world is galloping toward the things we already take for granted while we point fingers and wonder why successful people tend to become more successful.

It’s another answer to a question designed to dismiss recent economic success and stoke class envy.  Rep. Ruben Kihuen of Nevada suggested that higher minimum wages could correct the issue of the rich getting richer at the expense of the middle-class, to which Powell replied:

Over long periods of time, the only sustainable way for wages to go up is for productivity to increase. Productivity is a function of investment in people’s skills and investment in plants and equipment.

Average annual Productivity change in the nonfarm business sector, 1947-2017 - Percent change:

  • 1947-1973            2.8%
  • 1973-1979            1.2%
  • 1979-1990            1.5%
  • 1990-2000            2.2%
  • 2000-2007            2.6%
  • 2007-2017            1.2%

Last updated: February 1, 2018

Average annual Productivity change in the manufacturing sector, 1987-2017- Percent change

  • 1987-1990            1.6%
  • 1990-2000            3.9%
  • 2000-2007            4.3%
  • 2007-2017            0.8%

 Last updated: February 1, 2018

I’m not sure how to turn it around but I find in this age of the Internet of Things, artificial intelligence, and advanced robotics, we are having trouble getting more output from workers.

Fed Handles Monetary Policy

Democrat lawmakers spent so much time beating up the Fed chairman and asking about things he has nothing to do with that it was an embarrassment to the nation.  We needed the time for more answers on the economy, debt, and banking rules. Headlines this morning might blame Powell for yesterday’s selloff, but that’s a mistake.

As for the rest of Powell’s testimony, I think it was spot-on and investors should feel confident the Fed will not derail this rally.

Today’s Session

Big movers to the upside this morning include TJ Maxx, which also laid out plans for distribution of its tax cut windfall.

TJ Maxx is surging on earnings.  Here is some of its use of the 2017 Tax Act benefits:


One-time bonus


Meaningful contributions to charitable foundations


Significant increase in dividend and buyback programs

Repatriation of Cash

Repatriate $1 billion cash from Canada

Once again brick and mortar retailers are poised to rally, which continues to be the best proxy for consumer sentiment.

The big story in the market yesterday was earnings results at Dillard's +17% speaking to the resurgence of Trump country. States with the most stores where all won by Donald Trump.

  • TX 64 stores
  • FL 47
  • OH 15
  • GA 14
  • AZ 13
  • NC 13
  • LA 12
  • AL 11
  • AR 11
  • TN 11
  • MO 11

Forgotten folks are doing and feeling better, and that’s great news for everyone.

Economic Data

Economic data out includes revised GDP, which came in-line with consensus of 2.5%.   The most important parts of the report include:

Personal Consumption +3.8

-Goods 7.5%

  • Durable Goods 3.8%
  • Non-Durable Goods +4.3%

-Service +2.1%

Private Domestic Investment +3.3%

-Non-Residential +6.3%

-Residential +2.6%

This revision, coupled with guidance from corporate America, keeps our model for 1Q18 GDP to be well above 3.0%.