Is The Fed The Only Thing That Can Derail The Economy?

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Posted: Oct 17, 2018 11:12 AM
Is The Fed The Only Thing That Can Derail The Economy?

It was a huge session for the market as buyers flocked off the fence, creating the “fear of missing out” on yet another dip reversal on Tuesday. The buy-on-dip approach to the market has been a winner for so long that it's easy to assume it might stop working. I suppose it will one day, but while stocks were dipping, the American economy was getting stronger.

All the major equity indices closed up more than 2% and at session highs:

  • Dow Jones Industrial Average: +547
  • NASDAQ Composite: +214
  • S&P 500: +59
  • Russell 2000: +43

Sector Performance

S&P 500 Index

+2.15%

Communication Services (XLC)

+2.64%

Consumer Discretionary (XLY)

+2.01%

Consumer Staples (XLP)

+1.12%

Energy (XLE)

+0.83%

Financials (XLF)

+1.63%

Health Care (XLV)

+2.74%

Industrials (XLI)

+1.69%

Materials (XLB)

+1.61%

Real Estate (XLRE)

+1.87%

Technology (XLK)

+3.01%

Utilities (XLU)

+1.03%

Technology

Tech came roaring back, led by software names. I’m watching the semiconductors closely after negative comments from Morgan Stanley. I think there is a lot of value in this industry, and the PHLX Semiconductor Sector (SOXX) is coming off a perfect double bottom.

Consumer Services

The sector surged yesterday on the unlikely coattails of advertiser Omnicom Group (OMC). Today, there’s a good chance the index will rally to its all-time high as Netflix (NFLX) posted mind-boggling financial results after the close. The company simply blew away the Street with subscriber growth but also using typical measures of success, such as operating margins surging to 12.0% from 7.0%.

Subscriber Growth:

  • Domestic: 1.09 million, consensus 673,800
  • International: 5.87 million, consensus 4.46 million
  • Current quarter guidance: 9.4 million

Talking Smack!

Netflix Gives "New Fox” Shout-Out, but Says It Owns Everything Else:

Within linear TV, “New Fox appears to have a great strategy, which is to focus on large simultaneous-viewing sports and news.” These content areas are not transformed by on-demand viewing and personalization in the way that TV series and movies are, so they are more resistant to the rise of the Internet. The company goes on to say, “Other linear networks are likely to follow this model over time.”

Consumer Discretionary

The sector was helped big time by Amazon (AMZN), +$59.00 but also strong moves in dollar stores and buyers in footwear stocks. News of 7.1 million job openings is a monster backdrop for a strong holiday season and economic momentum going into 2019.

Industrials

This wasn’t the best performing sector in the market yesterday, but it’s very intriguing as transportation names have come roaring back. After the close, United Airlines (UAL) posted strong results and solid margins, considering the spike in fuel cost.

  • Passenger miles: 31.2 million +6.8%
  • Passenger revenue: +10.1 billion +11.6%
  • Cargo revenue: $296 million +6.1%
  • Airline fuel cost: $2.6 billion +42.2%
  • Operating margin: 11.1% from 12.0%

Trump versus the Fed

President Trump told my Fox Business colleague Trish Regan that the biggest threat to his presidency was the Federal Reserve.  

I think he’s right when it comes to the economy. In fact, I think the Fed is the only thing that can derail this economy. We learned yesterday that while global fund managers continue to see the trade war as the top tailwind risk, the fear is dissipating, while a miscue by the Fed is moving back up the charts.

In December 2017, the top risk was the Fed/Central banks, and that shifted to a bond crash in January and February of this year.

Today, we get the minutes from the last Fed gathering, and that should give us more insight. 

President Trump points to a lack of inflation risk as the crux of his frustration with the Fed’s rapid rate hikes and determination to continue to hike rates.

Without a doubt, the Consumer Price Index (CPI) report has reflected benign inflation signals.

I don’t think Powell will blow it, but some believe the Fed has triggered 11 of the last 12 recessions, so the anxiety isn’t far-fetched or loco.