The stock market wasn’t sold on Yellen’s final FOMC press conference
Yesterday the Federal Reserve, as expected, boosted interest rates by 0.25% and updated their economic projections, which included boosting its view on 2018 GDP to 2.5% from 2.1%. For 2019 and 2020, the Fed left its GDP forecast unchanged at 2.1% and 2.0%, and also signaled that it continues to expect to boost interest rates three more times in 2018.
While none of this news was a surprise, the stock market and the dollar sold-off during outgoing Fed Chair Janet Yellen’s final FOMC press conference. Perhaps it had something to do with the recent economic data that has several regional Fed banks cutting their GDP forecasts for 2017, raising questions over the Fed’s 2018 forecast?
Or it could be Yellen’s comments for continued growth past 2018, even though the Fed’s own economic projections see the economy slowing in 2019 and again in 2020?
Or it could be the fact the even though the Fed is usually an economic cheerleader, it only increased its 2018 GDP forecast by roughly half a percentage point based on FOMC members incorporating tax reform into their forecast. That’s far less of an economic bump than President Trump and others are expecting from tax reform.
Or it could be investors doing the calculus of potentially higher interest rates on ballooning consumer debt levels without any major uptick in wages. That means shrinking disposable income as consumers devote more after-tax dollars to interest payments. Not a good thing for an economy that relies on consumer spending, but from our thematic perspective it means our Cash-Strapped Consumer investing theme has legs into 2018 and beyond.
The other indicator that was rather revealing was despite the Fed’s view it could boost interest rates three times in 2018, financial stocks including the Financial Select Sector SPDR Fund (XLF) sold off, while gold ticked higher. Looking at the flattening yield curve helps explain the why behind this move lower in financials, and in our view the natural hedge offered by gold, a Scarce Resource theme contender if there ever was one, was welcomed given not only Yellen’s mixed comments but the market’s sky-high valuation of more than 20x expected 2017 earnings.
And with that, we bid adieu to Janet Yellen and get ready to welcome in new Fed chair Jerome Powell, who is likely to be more of the same – a consensus builder that is not likely to rock the Fed’s dovish bent. Yellen didn’t have a recession to contend with during her tenure, but given the length of the current business cycle, odds are Powell will have to deal with one. To us here at Tematica that means we are likely to see at least a few interest rate hikes in the coming year.
