Markets Could Face Significant Volatility Soon
Historically, the Federal Reserve had always been considered a nonpolitical body. But these days, all sorts of non-political bodies are now seen as completely political, whether it's the Fed, the Supreme Court, or what have you. So when Janet Yellen appears on Capitol Hill and doesn't expect gigantic economic growth in the U.S. for 2017, she's seen as harboring some sort of grudge against the Trump administration.
Are we really in an "Us vs. Them" scenario? Already? Let's all take a deep breath and take a peek at what the data has revealed. There's more of it in today's pre-market, for those interested in such things.
Initial Jobless Claims rose by 5000 to a still historically low 239K for the week. Seasonally adjusted Housing Starts fell 2.6% in January, although Building Permits - a forward indicator for future starts - rose 4.5%. This all seems to indicate things are quite good on the domestic economic front.
And that's before bringing up the huge Philly Fed soaring to 43.3 in January from a 23.6 figure in December. You'd have to go back to 1984 to find a higher read on the manufacturing index in the city of Philadelphia. This is, of course, a regional read, but following the strong Empire State (New York) read earlier this week, it's safe to say growth has strengthened in early 2017. And of course, Donald Trump was elected President in late 2016, so it should be reasonable to assume that at least part of this good fortune is due to a massive change in policy at the White House.
The stock market is a forward indicator, after all. So if it climbs to historic highs in the wake of election results and actions that back up Trump's campaign promises - especially regarding tax cuts and financial deregulation - which it has, then how could something like the Congressional Budget Office (CBO) only expect 2% growth this year?
Is it simply a "magical coincidence" that Q4 earnings are the strongest we've seen in the past two years, or is there some tailwind from the Trump victory? And if there is some correlation between this improved mood and election results, why can't these people admit that? After all, a Hillary Clinton victory practically guaranteed a crackdown on Big Pharma drug prices, and there was nothing on the horizon related to corporate tax cuts. So simply eliminating those things from the equation was bound to rise the tide, right?
Of course. But what people like Yellen and astute market participants have indicated is that along with the Trump administration promises of corporate windfalls, we also see higher levels of volatility on the horizon. This would be true even if there weren't negative leaks coming from White House workers on a regular basis, or the resignation of the president's National Security Adviser, or the stepping down of an important cabinet candidate, or a stand-off between the White House and U.S. intel.
You get the picture. With these promises of new money to pocket, we also see new reasons to be cautious. The market is currently calling out these worries by continuing to bid up market indexes - futures are down slightly in today's pre-market, but they are up big overall lately - but once questions regarding the smooth sailing of the new administration begin to manifest, might we expect a pull-back in equities?
That's the real question. The Fed seems to be considering it, which means a March funds rate hike looks to be a coin-flip from this view. And Q4 earnings are indeed stronger than they've been in a long time, but we've yet to see results from the majority of retailers, and we know they had a challenging holiday season.
So let the proof be in the pudding. Or don't. But if you put big bets on massive growth beyond what people who are paid to pay attention to these things currently see, then you take added risk along with it. Hopefully, everyone will come out better in the end.
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