This is what it sounds like when doves fly. Borrowing from Prince's famous song with a bit of a change, the doves were flying, not crying Wednesday after the transcript of Chairman Yellen's initial congressional testimony hit the wires. It was truly incredible.
The Fed, after posturing that it was going to raise rates come hell or high water, rather suddenly hinted it was just about done with its work. Last night Fed governor Brainard said the Fed was of course removing its accommodation, but also, somewhat perplexingly, noted the Fed was close to the end game.
Then this morning, Chairman Yellen affirmed a 'gradual' rate hike and balance sheet reduction path -- over the next "years." "Even so," said the Chairman, "the FOMC expects" interest rates to remain lower than historical levels while the balance sheet remains higher than historical levels. Further, the Chairman sees equal odds as to whether the US economy will be stronger or weaker ahead. No kidding: the FOMC put its 2017 GDP forecast at 2.2% and 2018 at 2.1%. To put this in context, the Fed is placing GDP well south of 3% annual growth for another 2 years after the first 10 year span of sub-3% annual GDP growth since the Great Depression.
Of course, with the utter madness that is Washington, DC, that forecast has actual facts as its basis. I have written and made eloquent speeches many times over the past 9 years that of course the economy would not improve with the business and jobs crushing laws and regulations sprouting from the 2009 stimulus bill, the ACA, and the hundreds of thousands of new regulations enacted the past 8 years.
With the Trump presidency daily shooting itself in the feet, some days multiple times, and the 'resistance' taking issue with anything Trump does from his choice of breakfast to his wife's dresses, the chance of legislative action on healthcare and taxes is highly questionable. Oh sure the 'leaders' in the Senate and House will try to cobble some healthcare bill and tax plan together to pass, but the healthcare will just be a rejiggering of the ACA without diminishing central government control, and any tax changes won't be reform, just some nominal tinkering with rates. And they will do that just to keep from getting lynched when they come back home and ask for your vote at the midterm elections. Gee, hope I didn't 'trigger' anyone with my language. Good grief.
So, the Chairman and the FOMC have a pretty good grasp of the situation in terms of potential growth given the level of animosity toward the President and the economy-sapping policies that remain in place.
Thus, since the market cannot have economic growth, it will have the Fed once more at its back. More than that, the Fed has the market's POLITICAL risk back as it is now basing policy on the political risk associated with getting the President's agenda passed (how about even considered?) and even the President not getting bogged down in impeachment or other such events. I mean, the entire lot of politicians and appointees, current and past, could be brought up on charges for REAL transgressions from Clinton to Lynch to Bush to Cheney to who knows how many more. Time to clean house, and I mean TOTALLY clean house, limit terms, limit what the Feds can legislate and order based upon the enumerated powers only, bulldoze half the federal buildings -- that would be a good start. But, not going to happen unless there is a constitutional convention, and then all bets are off.
But what about the market?
Oh, the market loved it. Low interest rates 'for years.' The Fed now has the market's back for political risk, not just economic. I guess we should toss in Zika, West Nile virus, the swine flu, risk of ISIS attacks, Russia hacking, North Korea ICBM tests, Fukushima radiation -- you name it.
Stocks gapped higher, rallied, tested midday with a lateral move, then rallied into the afternoon session. DJ30 put in a new high as all of the indices moved higher. NASDAQ and SOX continued their moves while the NYSE indices, after some dormancy as they based, gapped higher.
SP500 17.72, 0.73%
NASDAQ 67.87, 1.10%
DJ30 123.07, 0.57%
SP400 0.69%
RUTX 0.80%
SOX 1.62%
NASDAQ 100 1.21%
Volume was still disappointing with NYSE trade up but still well below average. NASDAQ trade was similarly higher, but also still well below average. Summer.
Only 1 new high on the day, but the NYSE indices awoke and showed some nice gains. All indices rallied, suggesting buying in most areas versus the rotation seen of late. Of course NASDAQ 100 again outpaced NASDAQ overall, meaning the move was still based primarily in large caps.
We bought some YY, RGEN, VVUS. We looked at more, but many faded the initial moves and volume was iffy. We will see how this move holds up tomorrow, particularly watching SOX and how it moves. Many of its stocks were up early, and while they held gains, they showed doji after good moves up to Wednesday.
Have a great evening!
Jon Johnson, Chief Market Strategist
InvestmentHouse.com
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