Jaws

Just When You Thought it was Safe to go in the Water… Last week we wrote about how inflation was starting to perk up again. This week, the Fed cut the Fed Funds rate another 0.25%, but at the press conference on Wednesday, Chair Powell noted that progress on inflation had stalled and “From here, it’s a new phase, and we’re going to be cautious about further cuts.” With those words, everybody was scrambling to get out of the water and Wednesday saw one of the largest one-day stock index declines in quite a while and bonds were not much better as long-term rates shot higher, too.

There was nothing that was said by the Fed Chair Powell that should have been a surprise to any serious market observer, so we view Wednesday’s mini collapse as more of an emotional response as we approach year-end after a very strong year for the S&P 500. There’s a natural inclination for investors to protect profits. We suspect that the market reaction to the Fed is more of an emotional release than a correction.

Jaws 2

We’re going to need a bigger government funding bill… This fight portends a bout of volatility as the odds of a government shutdown now appear to be quite high. The first so-called “Christmas Tree Bill”, that is, one that allows lawmakers to decorate that tree with pork barrel spending, was declared DOA by President-elect Trump and the Republican version that followed was voted down by numerous Republican fiscal hawks. Everyone thought it would be easy for a bill to be passed near year end, but that has not turned out to be the case. Let the games begin!

This is the tone setter for this Administration. There’s a lot of talk about controlling Federal spending, but the honest truth is that pork barrel projects are politically profitable, and any politicians first job is to get re-elected. But there is another problem here. This is the first ‘conflict’ and will likely set the tone for the new administration, so our expectation is that both sides will be dug in to exert their will to the maximum extent possible. That means this can get ugly very quickly and we suspect the stock market will not be a fan if that happens… until there is a resolution.

Don’t Worry, Be Happy

That lead-in brings us right back to our theme from the last several months. Don’t worry, Be Happy. Yes, there is a new administration coming and that implies big changes, but at a fundamental level, the changes are not as significant.

Our view is that the Fed’s inflation fighting job has been complicated by aggressive fiscal spending by the Biden Administration. We expect more of the same from the Trump Administration, the money will just be spent in very different ways. The implication is that economic growth will continue to trend higher, earnings can grow and therefore stocks have the ability to rise, but as always, there will be corrections along the way.

The downside is the threat of rising rates. Rate increases will pressure economic growth, all other things being equal. If the inflation trend worsens, further rate cuts begin to fade in the rearview mirror, while rate hikes will start to appear dead ahead. We believe that the Fed is very serious about licking inflation, so this is the risk that requires our regular attention.

Yes, there are some clouds on the horizon, but there are no storm clouds just yet, so steady as she goes.

Wishing you a peaceful holiday week…

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The views expressed in this commentary are subject to change based on the market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance, and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

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By: Adam