foxex: STOCKS SOAR AS FED GETS DOVISH

The Market Sum | INVESTOPEDIA

Insight after the bell

By Caleb Silver, Editor in Chief

Wednesday's headlines

1. Stocks soar as Fed gets Dovish

2. Chart of the Day: Interest rates and Fed Chair height correlation

Markets Close

Dow
25,366.43 +2.50%

S&P
2,743.78 +2.30%

Nasdaq
7,291.59 +2.95%

VIX
18.49 -2.79%

INV Anxiety Index
100.57 0.00%

US 10-Yr Yield
3.057% 0.00%

Stocks soar as Fed gets Dovish

Today is one of those days when you can absolutely tie remarks from the Federal Reserve to higher stock prices. The DJIA posted its best day in 8 months on the heels of comments from Fed Chief Jay Powell suggesting that the interest rate level is 'just below neutral'. His exact comments:

"Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy — that is, neither speeding up nor slowing down growth,"

Powell made these remarks in a widely anticipated speech at the Economic Club of New York, and the BUY signal was on. Nearly every sector rallied on the news except for Utilities, which have been a relatively safe harbor over the past few months. Even the FAANG stocks roared back today, Facebook included.

Look at the major markets right around noon today, when Powell was giving his speech:

Why it Matters: Rising interest rates have been one of the pain points hurting stocks. Powell's comments are being interpreted as a possible slowdown in the pace of rate increases going into 2019. As he says, interest rates are still low by historical standards, but further increases may have thrown the brakes on economic growth.

Does this mean that the Fed won't raise the federal funds rate again in December and into 2019? Hardly. Investors are still betting the Fed will raise rates by another quarter point at the next FOMC meeting 20 days from now, according to the CME. 2019 is the big question. We looked at FedWatch from the CME, which tracks the probability of future rate increases based upon Fed funds futures contracts. Today, there is an 82 percent probability of a rate hike in December, but the probability drops to the 40 percent range once we get into the schedule 2019 FOMC meetings.

What's Next: Does this mean that the worst is over for markets? In the immortal words of Cher from Clueless,

Rising interest rates are just one obstacle facing stocks. High valuations, slowing earnings growth, and a global economic slowdown are just a few of the others and nothing Powell said today has made them go away.

The bigger question is whether Powell felt pressure from the White House to rein in future rate hikes given the public shaming coming from the Oval Office. The truth is, we'll never know and we should give Powell the benefit of the doubt. The Federal Reserve is an independent agency and its mission is setting monetary policy to keep the economy growing with low unemployment and reasonable inflation. It should not care about the stock market unless monetary policy is hurting companies' ability to grow, hire and participate in economic growth.

For now, enjoy the rally. Just don't get too comfortable.

Plenty of other news today. Here are some headlines:

New Home Sales Fall to a two and a half year low
I received some tough reader feedback yesterday for being hyperbolic in describing the slowdown in home price increases in October. I deserved it and I apologize. Still, there is a problem in the U.S. housing market. It's not a crisis and it's not going to tip us into the economic abyss. Still, prices are getting soft in key markets for existing homes and sales are slowing for new homes. That's good for buyers, but rising interest rates may dampen their enthusiasm.

Amazon getting into patient record analysis (WSJ)
It's not new that Amazon is poking around the healthcare and pharma world. It bought PillPack earlier this year to deliver meds to your door. What is new is the WSJ's report that it could deploy its vast data-mining capabilities into patient records to provide doctors and hospitals information to improve treatment and cut costs. Read Amazon's press release to learn more. If you want to learn why Amazon thinks healthcare is ripe for this kind of disruption, read this piece from Dr. Atul Gawande, the man Amazon has hired to lead its foray into the field.

Who's the highest paid TV host? (Forbes)
This is not an investing story unless you are investing in a career to be a judge on a syndicated TV show. A lot of people don't know this, but the remarkable Judge Judy (Shiendlin) is TV's highest paid host. She makes more than Kimmel, Fallon, Colbert, Hannity, Ellen… you name it. All Rise!

Chart of the Day: Interest rates and Fed Chair height correlation
A while back, LPL Research posted this humorous, yet surprisingly accurate, chart that maps the correlation between interest rates and the heights of the past several Fed Chairs. Turns out that the correlation is very high.

This chart was posted in late 2017, before Jerome Powell took office as the new Fed Chair succeeding Janet Yellen. It's of particular interest now because The Washington Post reported just yesterday that President Trump hesitated to re-appoint Yellen last year in part due to her height – 5'3".

The chart below clearly shows that taller Fed chiefs appear correlated (somehow) to higher interest rates, while shorter ones are linked to lower rates. Throughout this year with Jerome Powell at the helm, we've seen the Fed raise interest rates three times, and a fourth hike is widely-expected in December.

Could this be due to Powell being taller than both his immediate predecessors? Is Trump regretting appointing a taller Fed Chair? Of course, we're kidding. But imagine if controlling monetary policy was as easy as just assessing the heights of potential Fed appointees.