foxex: The Wall of "No"

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Wednesday's Headlines

1. U.S. Markets Fall as Fed Minutes Indicate No Rate Moves

2. Infrastructure Bill in Doubt

3. Target Hits the Bullseye

Markets Closed

Dow
25,776.61 -0.39%

S&P
2,856.27 -0.28%

Nasdaq
7,750.84 -0.45%

VIX
14.75 -1.34%

INV Anxiety Index
110.4 Very High

US 10-Yr Yield
2.393 -1.36%

U.S. Markets Fall on Fed Minutes and Spending Bill Doubts

U.S. markets were under pressure all day today, and the minutes from the most recent Federal Reserve meeting on May 1, added to the pessimism. That meeting, which was before trade talks between the U.S. and China took a turn for the worst, indicated that (at the time) the Federal Open Market Committee (FOMC) was comfortable with where interest rates were, and had no plans to change them this year. We knew that from Chairman Powell's comments after the meeting, but to read the minutes and see that all members of the Committee felt that way, may have been disappointing to investors.

Here is the key passage:

"Members observed that a patient approach to determining future adjustments to the target range for the federal funds rate would likely remain appropriate for some time, especially in an environment of moderate economic growth and muted inflation pressures, even if global economic and financial conditions continued to improve."

Translation: "Get comfortable...We shall not move."

file photo, courtesy shutterstock

Why it Matters

The Fed has been promising patience all year, so this should come as no surprise. Chairman Powell has done so, even as the Trump Administration has publicly shamed the Fed for raising rates in 2018 and not cutting them in 2019. As an independent government body, Powell and the Fed have done the right thing by not listening. It must be hard.

Still, investors may have been holding out hope that the Fed would be more accommodating to help boost growth, now that corporate earnings are slowing along with the global economy. Lower interest rates boost capital spending, and spending juices the economy and therefore the stock market. (James has more on how this news impacted the 10-year U.S. Treasury yield in our daily chart, below)

What's Next?

The Fed will meet five more times in 2019. If you look at the CME's Rate Watch Tool like we do, you have to go all the way out to the December 11th, 2019 meeting to see when traders think the Fed will make a rate cut. About 64% of traders think rates will be cut by 0.25% - 0.50% at that meeting. A lot could happen between now and then, but the Fed minutes from the last meeting make this seem like it's not going to happen.

Infrastructure Spending in Doubt

One of President Trump's campaign platforms was infrastructure spending. The U.S. badly needs it, and it's an easy political win that both parties rallied around. It also helped boost infrastructure and construction stocks over the past two years.

That goodwill hit the 'Wall of No' today, as the President told reporters that he walked out of a meeting with Democratic leaders on infrastructure this afternoon, telling them, "I walked into the room and I told Sen. Schumer and Speaker Pelosi, 'I want to do infrastructure' … but we can't do it under these circumstances."

The circumstances the President was referring to are the multiple investigations Democrats, State and Federal agencies have launched into his purported activities as a candidate for president prior to his election in 2016.

That's not our territory, but we do know which stocks and sectors that were impacted by this turn of events.

Shares of Nucor, Martin Marietta Materials and Granite Construction, three of the biggest infrastructure related companies in the U.S., all traded lower today, although Granite was able to rally off its lows.

More News:

What's the Right Benchmark for Your ETF Investments?

6 Stocks To Ride The Cannabis Product Wave

Qualcomm Gives Up Recent Gains After Antitrust Ruling

What's Next

There is a chance that an infrastructure bill might actually make it to the President's desk and he will sign it. Anything can happen. But, we are in an era of unpredictability, as we have learned with the China trade talks and other issues that impact the economy and stock market. The safe bet here is continued uncertainty.

Target Hits the Bullseye

We wrote about the 'tale of two cities', facing retail stocks, yesterday. Quick recap: Those with growing e-commerce capabilities and limited exposure to tariffs on both the import and export side, are faring better than those that don't.

Target proved that it is winning on both fronts.

The retailer handily beat analyst expectations for revenue and profits, but more importantly, it grew both same store sales and online sales.

Same store sales grew 4.8% while online sales jumped 42%. Target has something that Amazon can't quite offer yet - curbside pickup for merchandise ordered online. Amazon is starting to do that with Whole Foods, but it doesn't have the store footprint that Target has. That has been a winning formula for Target and one you can count on seeing a lot more of. Here is a slide from Target's earnings presentation which shows its digital strategy.

charts courtesy www.koyfincharts.com

Advance Auto Parts' quarterly report beat estimates by 4%. Target had a day for reasons we talked about above.

Lowe's delivered an 8% miss on earnings today. Nordstrom reported quarterly earnings 46% lower than expected. Yes, you read that right.

Word of the Day

Antitrust

Today, a judge ruled that Qualcomm abused its position and size in the semiconductor industry in order to strangle competition and overcharge customers (cellphone makers). A good day to review what antitrust laws say, and what they are:

"Antitrust laws are regulations that monitor the distribution of economic power in business, making sure that healthy competition is allowed to flourish and economies can grow. Antitrust laws apply to nearly all industries and sectors, touching every level of business, including manufacturing, transportation, distribution, and marketing."

Today in History

May 21, 1973: Big day in the development of the Internet, as computer scientist Robert Metcalfe, working at Xerox's Palo Alto Research Center (PARC), drafts a memo describing what he calls The ETHER! Network, or Ethernet.

Michael Hiltzik, Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age (HarperBusiness, New York, 1999), p. 187

Chart of the Day: Yields Drop on Dovish Fed Minutes

Wednesday's release of minutes from the early May FOMC meeting clearly struck a dovish tone, pressuring government bond yields like the benchmark 10-year U.S. Treasury yield. The summary of the FOMC meeting indicated that the Federal Reserve will likely refrain from raising interest rates "for some time." Even more dovish was the addition of "even if global economic and financial conditions continued to improve." Generally, an improving economy helps place upward pressure on interest rates. But the Fed is now saying that it would resist that pressure, at least for the foreseeable future.

As shown on the chart, the 10-year Treasury yield has virtually been in a state of free fall since the major double-top pattern around 3.250% completed forming in November of last year. Now, the tables have turned and the 10-year yield has just formed a double bottom right around the 2.350% level. The first bottom was in late March, which hit a level not seen since the end of 2017. And just last week, the benchmark yield dropped down to test November's trough. Since the second bottom, the yield was on the rebound until Wednesday, when the dovish Fed minutes were released.

Strong declines in bond yields have been driven in recent months by fears of slowing global economic growth, dovish-turning central banks, and expectations of low interest rates for longer. Most recently, an escalating trade war between the U.S. and China has reignited fears that protectionist policies on both sides could further weigh on global economic growth. Now that the Fed has indicated in no uncertain terms that it intends to keep rates on hold, the outlook for yields continues to be to the downside. For the 10-year yield, there is a distinct possibility that the double bottom could see an impending breakdown, which would be a substantially bearish signal for yields.