foxex: No Hiking!

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Wednesday's Headlines

U.S. Markets Dive on Fed Announcement which Forecast Economic Headwinds

Markets Close

Dow
25,745.67 -0.55%

S&P
2,824.23 -0.29%

Nasdaq
7,728.97 +0.07%

VIX
13.91 +2.58%

INV Anxiety Index
98.61 Low Anxiety

US 10-Yr Yield
2.535 -3.02%

Credit: Justin Sullivan/Getty Images

Fed Promises no More Hikes in 2019, but...

That's it...No more interest rate hikes in 2019, according to the Federal Reserve. That wasn't unexpected. But what did sting a little was Federal Open Market Committee's (FOMC) commentary on the slowdown in the U.S. economy, which is being exacerbated by the steeper slowdowns in Europe and China.

No more rate hikes is generally good for stocks, since lower interest rates incentivize more borrowing and lending by companies, which is the fuel for the economy's fire. But when that fire starts to weaken because companies and consumers feel or fear an economic slowdown, trouble is brewing.

These are the key points from the Fed's announcement today:

"...Information received since the Federal Open Market Committee met in January indicates that the labor market remains strong but that growth of economic activity has slowed from its solid rate in the fourth quarter...Recent indicators point to slower growth of household spending and business fixed investment in the first quarter."

Gulp...

None of this is a surprise since we look at the same economic data as the Fed does: Manufacturing activity, employment reports, household spending and debt, etc. However, it's kind of rare to outright promise no rate hikes for the next 9 months. Nevertheless that's exactly what Powell did today. The Fed refers to what it calls the 'Dot Plot', which is a diagram of where the Fed Governors think interest rates should be now and in future years. It ain't pretty, but it's pretty interesting.

Why it Matters

The Fed thinks interest rates should be right where they are - at least the majority of Fed Governors do - which is useful for consumers since our mortgages, car and credit card payments are tied to the overnight lending rate. Lower and stable interest rates also help the housing market, since lower monthly payments incentivize would-be home buyers to buy or re-finance their homes.

On the other hand, lower interest rates are not great for savers, fixed income investors and retirees living off their savings. It's also not good for banks, which make their money through lending. Just look at how the IYF ETF, which tracks regional banks in the U.S. headed South right after the Fed announcement at 2pm today.

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Bank stocks are key indicators and leaders of the overall market trend, which is why we saw stocks sell-off today despite the typically good news about maintaining interest rates at current levels. The bond market did not like this news much either. James has more on what happened to the 10-year U.S. Treasury bond today in our daily chart, below.

Trade War Uncertainty

Add this to the list of economic uncertainties. President Trump said earlier today that the existing tariffs against Chinese imports may be in place for a "substantial period of time..." This, he says, in order to ensure that China will comply with all aspects of a trade agreement the two sides have reportedly been working on. In the same press conference, Trump also said that the, "the deal is coming along nicely", and that 'President Xi is a friend of mine." There have been reports that China and the U.S. are in the final stages of hashing out an agreement, but the mixed messages out of both sides have been anything but reassuring to investors, companies and manufacturers who like a little more certainty when making financial plans.

Mickey is a Boss!

Disney, aka "The Mouse House", just got a lot bigger. The entertainment and theme-park giant completed its acquisition of 21st Century Fox for $71 billion today, bringing the Marvel characters, Fox television channels and a host of other entertainment properties with it.

Why it Matters

In case you missed it, the media industry is going through a massive consolidation. Giants like Comcast have acquired content assets like NBCUniversal, AT&T bought Time Warner, Verizon acquired Yahoo and AOL and Disney just bought 21st Century Fox. Disney is a pure content and entertainment company and has chosen to stay that way. The phone and cable companies like AT&T and Verizon want content to put through their pipes so they can continue charging a premium to consumers who want to watch their favorite shows anytime and anywhere. Disney has watched Netflix disrupt the entire content industry and knows that Content is actually King, and they'll figure out distribution on their own. They are doing that by launching Disney+, their own streaming service, later this year. I have this little feeling that Disney won't be needing to license its movies to Netflix much longer given this line up of content assets:

A Jeans Thing

Levi Strauss & Co., which created the blue jean, is going public. The legendary American company made its first blue jean in 1876 for California gold miners who needed a rugged pair of pants for the gritty work of pounding rock in search of the precious metal. It originally went public in 1972, but was taken private in 1985 by the Haas family, which will maintain a 10% controlling interest after the IPO. Levis Strauss is seeking to raise $550 million through the IPO, which the company says it will use to make acquisitions that that would "drive further brand and category diversification." It will also pay off existing shareholders, including members of the Levi-Strauss family. The company reported net sales of $5.9 billion in fiscal 2018, 55% of that from the U.S.

Go anywhere in the world and you will always see two things: Coca-Cola and Levis.

If you love company history, read the Levi Strauss story on its website.

Chart of the Day: Dovish Fed Pressures Bond Yields to 14-Month Low

As widely expected, the Federal Reserve kept interest rates on hold at 2.25-2.50%, and extended the dovish outlook that the central bank has been pushing forth since the beginning of the year. Prior to the FOMC announcement, futures markets were pricing in a full 98.7% likelihood that the Fed would remain on hold. It was also expected that the Fed would indicate no further rate hikes this year. As revealed on Wednesday, the median outlook from FOMC members indeed calls for no rate hikes in 2019. In addition, the Fed indicated that it will end its balance sheet reduction program in September.

All of this potentially market-boosting dovishness, however, did come with an important caveat - the Fed also lowered economic growth (GDP) expectations. Despite this concerning reduction in the growth outlook, stocks surged in the immediate aftermath of the announcement. The S&P 500 turned positive after having traded in the red earlier in the day due to a comment from President Trump that China tariffs may remain in place for a "substantial period of time." By the end of the trading day, though, stocks had pared those Fed-driven gains and closed in the red once again as bank stocks fell on the prospect of an extended period of low interest rates.

The most notable market move on Wednesday was in bond yields, which fell sharply on the prospects of lower growth and no new rate hikes this year. The US 10-year Treasury yield extended down to hit a new 14-month low, below the early-January 2019 low of 2.54%. Not since January of last year has this benchmark yield seen such depths. Since the double top around 3.25% in October and November of last year, the 10-year yield has seen a sharply declining trend as the Fed has become increasingly dovish. Wednesday's FOMC decision was even more dovish than expected, prompting the yield to break down to new lows.

As it currently stands, the chart shows that the 10-year yield is well below both its 50-day and 200-day moving averages, and the former is far below the latter. This suggests a highly "bearish" yield environment that may likely extend, helping to boost bond prices further.