foxex: POW!(ell)

The Market Sum | Investopedia

Insight after the bell

By Caleb Silver, Editor in Chief

Wednesday's Headlines

1. Fed Pledges Patience; Markets Roar

Markets Close

Dow
25,014.86 +1.77%

S&P
2,681.05 +1.55%

Nasdaq
7,183.08 +2.20%

VIX
17.72 -7.37%

INV Anxiety Index
100.78 Neutral

US 10-Yr Yield
2.695 -0.63%

Markets Today

POW! I mean, Powell! Jay, that is.

Markets sprinted out of the gate today on the heels of solid earnings from Boeing and the afterglow of Apple's report on Tuesday. But they really took off when Fed Chair Jay Powell said the Fed will 'be patient' in regards to further rate hikes in 2019, pending economic conditions. The DJIA crossed back through 25,000, adding 1.7%.

These were the magic words that lit a fire under stocks around 2:15 pm ET:

"...In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes." - Yours truly, the Federal Open Market Committee

Strong earnings and a patient Fed??!! What else could investors ask for?

How about a more deliberate approach to the Fed's plans to unwind its balance sheet? We got that, too!

The very issue we described in yesterday's newsletter was addressed by Powell and the FOMC, who pledged patience here, too. These were the magic words:

"...The Committee is prepared to adjust any of the details for completing balance sheet normalization in light of economic and financial developments. Moreover, the Committee would be prepared to use its full range of tools, including altering the size and composition of its balance sheet, if future economic conditions were to warrant a more accommodative monetary policy than can be achieved solely by reducing the federal funds rate." Lots of love, the Federal Open Market Committee

So accommodating all of a sudden, so attentive, and affirming and validating (OMG guys the Fed is, like...a really good boyfriend). What happened to last October's rhetoric about the fed funds rate being 'far from neutral', and the deleveraging of the Fed's balance sheet on 'autopilot'? Forget about that... Let's focus on the future!

Why it Matters

For now, that future looks a little brighter for stock investors. For bond investors it's another story. (James has more on the impact to the all-important 10-year U.S. Treasury bond, below)

The risks are still lurking, to be sure: another potential government shutdown, trade talks with China could fall apart, Brexit could tip the EU into a tailspin, just to name a few. They are all very real and have nothing to do with monetary policy (the Fed's domain). They all could impact corporate earnings, however.

To date, those earnings have been good, not great. There have been outliers like Boeing (BA), AMD (AMD), and even Tupperware, which reported strong earnings for the past quarter and stronger outlooks for 2019. But, the trend is weaker than it has been in the past few years, and we knew it would be. Credit Suisse has the tally as of this morning:

37.8% of the S&P 500's market cap has reported 4Q. Earnings are beating by 2.0%, with 66% of companies exceeding their bottom-line estimates. This compares to 4.9% and 70% over the past 3 years.
4Q expectations are for revenues, earnings, and EPS growth of 5.5%, 10.8%, and 12.8%, respectively.

Good, not great.

The big risk that no one wants to talk about (even a little bit) is the ever-climbing U.S. Debt, which is at nearly $22 trillion.

Powell was asked about that in today's press conference, even though government spending is not in the Fed's purview. Powell punted that across the Washington D.C. Mall to the President and Congress, urging them to tackle it now while the economy is relatively strong.

It's a great idea. Don't count in it happening.

Earnings Bonanza

36 companies, representing 10% of the S&P 500 reported earnings today, including Microsoft (MSFT), Tesla (TSLA) and Facebook (FB). By the end of 2018 Microsoft had become the most valuable company in the world, streaking past both Amazon (AMZN) and Apple (AAPL), which were both hobbled by bad news and sentiment. Facebook has its own issues that have nothing to do with a slowdown in China. Tesla has issues, too - mostly in the corner office. Still, these are among the most widely held stocks in the world, and have a major impact on the direction of the markets.

Over the past month, Facebook has been surging while Microsoft has held steady. Tesla has been sliding into reverse.

Their earnings reports, which just crossed the wires, should do nothing to change that.

In brief:

Facebook reported a 7% jump in profits, a 30% revenue growth and a 21% rise in average revenue per user. The stock is flying after-hours.
- Read Facebook's press release

Microsoft reported earnings in line with expectations and missed slightly on revenue.
- Read Microsoft's press release

Tesla missed on earnings, although it did manage to report a second consecutive quarter of actual profits. Revenue was slightly higher than forecast, but there is concern about cash-burn at the automaker, which intends to ramp up production of the Model 3 this quarter. It also has $920 million in debt coming due at the end of March.
- Read Tesla's press release

Chart of the Day: Treasury Yields Resume Downtrend on Dovish Fed

The Federal Reserve kept interest rates unchanged on Wednesday as widely expected. But it took just one word from a strikingly dovish Fed to extend Wednesday's sharp stock rally and cause U.S. Treasury yields to fall further. That word was "patient." More specifically, the Fed's statement after its two-day FOMC meeting said that "the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate."

Because this statement was significantly more dovish than what the Fed has stated in the past about raising rates, investors interpreted it as a sign that interest rates may be substantially slower to rise than previously expected. This was good news for the stock market, and prompted bond yields to drop as expected. Fed Chair Jerome Powell also said in the subsequent press conference that the case for more rate hikes has "weakened," and that the Fed would "need to see a need for further rate hikes." Overall, Wednesday's statement and press conference were more dovish than the Fed has been in quite a while.

As stocks surged, the benchmark 10-year Treasury yield fell on Wednesday from a high of around 2.735% down to a low of 2.673%. While this one-day drop in the yield was significant, it's nothing new when put in the context of the past few months. As the Fed has become progressively more dovish - giving off signals of more patience and slower interest rate increases on the horizon - bond yields have been falling sharply since early November. Yields rebounded abruptly in the first half of January from the New Year's low around 2.541%, but have been falling again for most of the past week. There was also a technical "death cross" in the 10-year Treasury yield in early January, as shown on the chart above, which hints at a bearish environment for bond yields.

Where do yields go from here? From the tone and content of the Fed's statement and press conference on Wednesday, it looks like Fed dovishness may be here to stay. And if that is indeed the case, Treasury yields could have significantly further to fall and stocks could reap substantial benefits from the prospect of lower interest rates for longer.

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