When Is It Okay For The Fed To Hike Rates?

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Posted: Apr 22, 2019 9:54 AM
When Is It Okay For The Fed To Hike Rates?

Source: AP Photo/Jacquelyn Martin

Solid Week

Last week was another solid week for the market, as major indices moved even closer to new all-time highs. The only issue is market breadth, which is what I have tried to prepare everyone. Valuations are getting stretched by so many stocks; and while many will go on to outsize valuation, which are significantly higher from current levels, the winner’s circle will narrow.

  • NASDAQ Composite: +20.6%
  • S&P 500: +16.0%
  • Dow Jones Industrial Average: +13.4%
  • Russell 2000: +17.4%

Earn, Baby, Earn:  Scoreboard

The earnings season is coming in better than expected. Revenues are falling short, and it’s a legitimate concern. By the same token, earnings are rocking, and it would be impressive, even if estimates weren’t beaten down to pure panic.

77 companies reported:

  • 48.1% beat on revenue (long-term average 60%)
  • 77.9% beat on earnings (long term average 65%)
  • 85 negative earnings warnings
  • 31 positive earnings warnings

There are 155 S&P companies scheduled to report this week.

Economic Boom

The economic backdrop in this market is remarkable. In fact, it’s so good that very soon, we may hear the experts warn about the Federal Reserve. What many don’t get is that it’s fine for the Fed to hike rates when inflation is beginning or looking to run away. However, old assumptions, such as higher wages, automatically triggering inflation are unfounded and outdated.

Consumer

The U.S. retail trade jumped 1.6% from a month earlier in March 2019, following a 0.2% drop in February, and easily beating the market’s expectations of a 0.9% advance. That was the biggest increase in retail trade since September 2017, boosted by sales of motor vehicles and a range of other goods.

Retail & Food Sales

M/M

Y/Y

Total

+1.6%

+3/6%

Auto

+3.1%

+3.8%

Furniture

+1.7%

+1.1%

Electronics

+0.5%

-2.7%

Building Materials

+0.3%

+3.3%

Food & Beverage

+1.0%

+1.8%

Health & Personal  Care

+0.2%

+4.4%

Gas Stations

+3.5%

+3.1%

Clothes

+2.0%

+1.5%

Sporting Goods

-0.3%

-9.7%

General

+0.7%

+1.9%

Misc

+1.8%

-1.2%

Internet

+1.2%

+11.6%

Food

+0.8%

+4.3%

 

Investors Too Indifferent

The individual investor’s sentiment, as measured by the American Association of Individual Investors (AAll), saw a decline in bullishness and a surge in neutral. The bottom line is the unloved market has remained unloved for more than a decade. 

The neutral, at its highest since July 26, 2018, when it was 41.58, reflects a kind of indifference that’s more problematic to me than excessive bullish or bearishness.

2019 Milestones

When either of these sentiment levels gets north of 50, it might be a red flag. For now, it’s a red flag and a damn shame that individual investors continue to watch this market from afar warned off by folks selling snake oil.

  • Bullish high point:  41.53, Feb 28
  • Bearish: 42.77, Jan 3

Capitalism versus Socialism

Sears (SHLDQ) is taking former Sears CEO Eddie Lampert to court, saying he enriched himself to the tune of billions while running and stripping the company. The role of some private equity and hedge funds has left a stain on the world of investing. 

I don't consider them to be "Wall Street." In a certain sense, it is where the money is raised to help take ideas to fruition, and where individuals can freely trade stock and have access to wealth creation. However, these horror stories (Sears & Toys “R” Us) are told as an indictment of all of Wall Street, which has been portrayed as a greedy villain since the beginning of time.

It’s one-way for a rally of the ages if it’s greeted by individual investors with a yawning indifference, and it’s one-way if socialists could be making a run for the White House amid mass prosperity.

Portfolio Approach

Communication Services

1

Consumer Discretionary

4

Consumer Staples

1

Energy

1

Financials

1

Healthcare

1

Industrial

3

Materials

3

Real Estate

0

Technology

2

Utilities

0

Cash

3

 

Today’s Session

Equity futures are under pressure, but the selling picked up on the Pompeo press conference. The United States is enforcing sanctions against countries doing business with Iran, allowing waivers to expire on May 2.  The government told 5 countries, including our allies Japan, South Korea, and Turkey, that they may no longer continue to import oil from Iran without facing sanctions from the U.S. The goal is to deprive Iran of funding and incentivize the country to stop funding terror groups like Hamas and Hezbollah and Yemen civil war.

Forty percent of Iran’s annual revenue is from oil, and thus far, sanctions hit Iran for $10 billion.

Saudi Arabia and UAE will assist the U.S. in pumping oil to mitigate any price spike.