FED TO THE RESCUE

The major stock market averages opened a bit higher this morning (Dow +50 pts; SPX +.25%). This week has been one of recovery, especially after a couple of Federal Reserve officials hinted that they’d loosen monetary if necessary to keep the business cycle alive. Energy is the best performing sector in early trading, up 1.2% despite the fact that oil prices are down again. Some kind of bounce is to expected since energy has absolutely cratered over the past six weeks on oversupply concerns. Today, WTI crude oil is down .6% to trade around $51.44/barrel. Gold is now up 4% on the year as a safe-haven trade. Bonds are trading higher this morning as yields dip again. The iShares 20+ Year Treasury Bond ETF (TLT) shot up 1% today as the 10-year Treasury bond yield fell back to 2.09%. The reason for continued bond market gains is also the Fed (see below).

A big part of the reason why the stock & bond markets are rising this week has to do with the Federal Reserve. On Tuesday, Chairman Jerome Powell said, “We do not know how or when these trade issues will be resolved. We are closely monitoring the implications of these developments for the US economic outlook and, as always, will act as appropriate to sustain the expansion.” Investors took that to mean he will not let the economy fall into recession. Accordingly, bond traders immediately placed bets that the next Fed move will be to lower interest rates, as early as next month. And expectations for lower rates boosted both stocks and bonds. The Fed is between a rock (slowing global economy) and a hard place (Trump’s unpredictable trade policy). As the Wall Street Journal puts it, “officials must balance the risks of easing too soon with the costs of waiting too long.” They don’t want to be seen as reacting to stock & bond prices, but it certainly appears that way.

Bond yields are falling, inflation is tame, and today we found out that unit labor costs are falling. The cost of labor per unit of output fell 1.6% in the first quarter of 2019 vs. the year-ago quarter. It’s not because wages are falling—they aren’t. It’s because productivity surged 2.4% (the highest rate of improvement in about nine years). Now, that rate may be unsustainable, but the recent trend has been upward after years of roughly flat productivity. Rising productivity is a key ingredient in an expanding economy, allowing corporate profit margins to expand and wages to increase.

CNBC contributor Kevin O’Leary, who owns scores of small businesses, says he doesn’t see evidence of a coming recession. Noting increasing cashflows across the board, he says, “We’re on fire.” This gives him confidence to continue owning stocks.


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