"You're blowing it, son!"
It was one of those fights that were years in the making, where finesse met ferocious. Everyone in my family, especially my mom, loved Sugar Ray Leonard, but she thought he would be beaten badly by Thomas “Hitman” Hearns. The first of their eventual two matches was an instant classic. The irony is that the man with all the slick moves turned into the ferocious fighter, looking to exert his will.
After the 12th round, legendary boxing trainer Angelo Dundee gave it to Leonard (in his face) straight: “You’re blowing it, son!”
Sugar Ray went out and became the slugging stalker, scoring a knockdown in round 13, and was awarded a technical knockout (TKO) in round 14.
I was reminded of that great fight, thinking about the verbal gymnastics Federal Reserve Chairman Jay Powell used yesterday to trigger a quick rush for the exits. The Powell Fed was wrong about the economy for all of 2018 and took actions akin to an overhand right and a monster uppercut, trying to knock out the non-existent foe of inflation.
Yesterday, Powell found himself offering another mea culpa about his misread of the economy just a month ago. If there were rounds during his presentation at the Council on Foreign Relations (CFR), a wise trainer would have told him: “You’re blowing it, son!”
When the FOMC met at the start of May, tentative evidence suggested these crosscurrents were moderating, and we saw no strong case for adjusting our policy rate. Since then, the picture has changed. The cross-currents have re-emerged, with apparent progress on trade turning to greater uncertainty and with incoming data raising renewed concerns about the strength of the global economy.
Remember back in May when the market swooned on comments about low inflation being transitory? It’s still transitory. However, I guess the current trade question is an issue, along with the weak global economy. I’m not buying these excuses for the Fed erasing mistakes from last year, but it doesn’t matter if the Fed does the right thing.
The problem is one day, the Powell Fed is a slugger. And the next day, it’s a slick boxer. The only thing getting hit is the reputation and confidence in the monetary body to admit mistakes and correct its course. Ironically, yesterday saw Powell move from constant jabbing from President Trump to body blows from Wall Street.
It’s one thing to fend off bothersome tweets, but no Fed chairman would last long under the bullying barrages from Wall Street when it’s not happy with policy decisions. Of course, Wall Street keeps getting ahead of itself as usual. The momentum was building for a 50-basis point (BPS) rate cut next month, but Powell and Bullard sent that notion reeling.
Coming into yesterday’s session, the market saw a 40% chance of 50 bps cut, and by the time the closing bell rang, as it was down to 27%.
I think the selling was excessive with respect to the Fed only cutting 25 bps rather than 50 bps (by the way, it could still be the larger number). Nonetheless, major indices were in the shadows of all-time highs. I get where some folks would want to take profits. The thing is all-time highs can coincide with excessive valuations, and that isn’t the case.
Bigger selling in high-Beta technology is dragging the NASDAQ down the most. Perhaps, there’s some support if Micron Technology’s (MU) after-hours gains hold.
Decline and Key Support:
- NASDAQ: -1.51% 7,792
- S&P 500: -0.95% 2,889
- Dow 30: -0.67% 26,106
- Russell: -0.59% 1,465
There are no changes to the model portfolio - we are considering taking profits on a couple of positions, where certain trends have stalled in part to having more cash on hand.
May orders for U.S. durable goods disappointed again, declining 1.3% following April’s revised-2.8% from -2.1%. The drop in May was largely due to a canceled Boeing (BA) 737 Max deal.
However, business investment beat, up 0.4%, a sign that spending plans by companies have not been put on hold.
If you take out autos and planes orders rose 0.3%, order. Auto orders rose 0.6% in May.
Core Durable Goods
All the major indices are firmly in the green this morning, with Nasdaq leading the way and benefiting from Micron’s beat (MU), which is lifting the chip sector higher.