foxex: Steady Fed Roils Markets

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Wednesday's Headlines

1. Fed Holds Rates and Investors Don't Like it

2. Investor Sentiment is Weak, Which is a Bullish Sign

3. Forget ''Sell in May, and Go Away"

Markets Closed

Dow
26,430.14 -0.61%

S&P
2,923.73 -0.75%

Nasdaq
8,049.64 -0.57%

VIX
14.8 +12.80%

INV Anxiety Index
96.17 Low

US 10-Yr Yield
2.511 +0.08%

U.S. Markets Steady as Fed Holds Rates

No surprises from the Federal Reserve today as the FOMC (Federal Open Market Committee) held interest rates steady at 2.25%-2.50%, citing a lack of inflation pressure, even as the U.S. economy strengthens.

Here's the key quote from the committee:

"...On a 12-month basis, overall inflation and inflation for items other than food and energy have declined and are running below 2 percent. On balance, market-based measures of inflation compensation have remained low in recent months, and survey-based measures of longer-term inflation expectations are little changed."

Remember. The Fed is principally concerned with two things as it considers monetary policy: inflation and unemployment. Both are historically low and the U.S. economy is growing at a 3.2% rate, according to the latest report on GDP.

Translation: If it ain't broke, don't fix it.

So... Why did the DJIA do this right after the Fed announcement at 2pm?

A lot of investors were rooting for an interest rate cut or a sign from the Fed that it may cut rates later this year. We know President Trump has been goading the Fed to do just that, but Fed Chair Jerome Powell gave no indication that a cut, or a hike, for that matter, are in the cards in 2019. Why would he? The stock market is already at record highs again, unemployment is near an all-time low and inflation is as tame as a teddy bear.

If we look out to the end of the year, investors place a 40% probability on either a rate hike or a rate cut for the Fed's last meeting of the year in December. Put another way, it is even money that there will be no rate changes this year, and that is disappointing to stock investors who root for rate cuts because they usually act as an accelerant to stock prices. Lower interest rates means cheaper borrowing costs, which translate into more business and consumer spending.

Here's the CME's Fed Watch tool projection for the Fed's December 11th, 2019 meeting.

Does a Trade Deal Matter Anymore?

In the beginning of the year, any news of progress on the U.S. and China trade negotiations was good enough for a rally. Oh, how times have changed. "Sources" indicated today that an agreement with Beijing on tariffs could come as soon as next Friday. U.S. Trade representatives have been in China all week, and Chinese Vice Premier Liu He is expected to visit Washington next week. Investors on both continents shrugged it off.

Investors are Less Bullish, Which is Actually...Bullish
In our latest installment of 'Investor Reverse Psychology', we bring you the Bank of America 'Sell-Side Indicator'. The Bank's equity research team surveys investors on the last day of every month to gauge whether they are bullish or bearish on the stock market for the rest of the year. Ironically, the more bearish or pessimistic investors are, the better the market does, according to BofA. Remember the famous Buffett phrase I quoted yesterday..."Be fearful when others are greedy and greedy when others are fearful." It's kind of like that.

According to BofA's survey from yesterday, investors bearishness is at a 6-month high. With markets near all-time highs and earnings on a downtrend, investors have plenty of reasons to be fearful. BofA sees this as a contrarian indicator. Its equity research team writes, " When our indicator has been this low or lower, total returns over the next 12 months have been positive 92% of the time."

Given that, the team predicts that the S&P 500 will rally an additional 11% over the next 12 months. Don't take this as investing advice, by the way. This is just one of the indicators BofA uses to make its stock market predictions. It's just good to be aware of the various indicators out there.

More News:

Survey Shows Stress Compounds Among Young Investors

4 Investing Gurus See Dismal Stock Gains In Next 10 Years

3 Tech ETFs Soar As Cash Pours In Amid $1 Trillion Rebound

Charts courtesy of www.koyfin.com

Royal Caribbean reported a strong quarter and says booking for 2019 are robust. The cruise company has a fleet of new ships it plans to launch this year, as well.

It was a bad day for beer, especially the Molson Coors Brewing Company. The company missed earnings and revenue estimates and said currency headwinds, aka the strong dollar, is hurting its sales overseas.

Word(s) of the Day

Sell in May and go Away

"Sell in May and go away" is a well-known financial-world adage, based on the historical underperformance of some stocks in the "summery" six-month period commencing in May and ending in October, compared to the "wintery" six-month period from November to April. If a trader or investor follows the sell-in-May-and-go-away strategy, they would divest their equity holdings in May (or at least, the late spring) and invest again in November (or the mid-autumn).

The phrase "sell in May and go away" is thought to originate from an old English saying, "Sell in May and go away, and come on back on St. Leger's Day." This phrase refers to a custom of aristocrats, merchants, and bankers who would leave the city of London and escape to the country during the hot summer months. St. Leger's Day refers to the St. Leger's Stakes, a thoroughbred horse race held in mid-September and the last leg of the British Triple Crown.

This expression, like a lot of investing adages, is useless today. Investing is a year-round activity and global markets are interconnected like never before. Stock markets and investors don't take pre-determined breaks beyond national holidays. Trading volume does taper off a bit during the summer and over the Christmas holiday, but don't think for a second that the markets will take a break for the next six months. It's just a cute expression.

source: syracuse.edu

Today in History

International Workers' Day, also known as Labor Day or May Day, falls on May 1 and is a public holiday in over 80 countries. It is meant to celebrate the contributions of workers, promote their rights and commemorate the labor movement.

While May Day is also a holiday to mark the arrival of spring in the Northern Hemisphere, it became associated with trade union activities in the late 19th century. Protest rallies and strikes take place around the world on this day, sometimes leading to clashes with police. The Catholic Church instituted the feast of Saint Joseph the Worker on May 1 in 1955.

Marxist historian Eric Hobsbawm said Labor Day is "perhaps the only unquestionable dent made by a secular movement in the Christian or any other official calendar."

In July 1889, Second International, a global organization of socialist parties and trade unions, established May 1 as International Workers' Day and planned protests demanding an eight-hour workday.