16 Sep NO MAJOR SURPRISES IS EXPECTED FROM TODAY’S FED MEETING
Today is the conclusion of the two-day FOMC meeting. It is largely anticipated the Fed will reiterate its willingness to let inflation run higher than its 2.0% target to make up for period when it has run below 2.0%. It initially announced this policy change on August 27.
The Fed’s favorited measure of inflation is the PCE deflator which is a broad-based index of services and goods utilized in the economy based upon the typical percent that expenditure comprises in a typical household. For example, housing is about 32% of the PCE and food is about 15%.
During the past ten years the PCE deflator has grown about 1.5% annual rate so in theory the Fed could let it grow at an annual rate of 2.5% for the next ten years and claim consistency.
Back in June, the Fed was forecasting a 0.8% rise for the PCE for 2020. This now appears low and analysts are expecting a 2020 increase between 1.2% and 1.4%, which is close to the 1.5% average of the last 10 years.
In June the Fed forecasted a 1.6% and 1.7% rise for 2021 and 2022, respectively.
The major question at hand what happens, if some believe, inflation clearly and persistently outstrips the Fed’s long run 2.0% target? Those who ascribe to this view focus upon record money supply growth, surging deficits, the broken supply chains, record low inventories where demand is vastly outstripping supplies, and increasing wages.
Some believe the Fed has embarked upon a dangerous game, forgetting the painful lessons learned in the late 1960s through the early 1980s.
For now, no change in policy or statements is expected today but I believe the stakes are very high.
Speaking of inflation, a Bank of America survey indicated that 80% of respondents believe the trade in US technology stocks is the world’s most crowded trade. This is up from 59% in August. The survey also indicated this “bubble” is the second greatest concern facing the market, ranked only behind a resurgence in Covid-19.
This extremely crowded trade is causing great concerns. According to Bloomberg the SEC states “a large cap growth mutual fund with $300 billion in assets under management could classify themselves as diversified if individual positions amount less than 5% of their assets.” According to Bloomberg most of these “diversified” funds have more than 25% of their portfolios invested in individual assets that exceed the 5% limit.
Wow! How will the SEC address this issue?
A major question at hand does this “diversification rule” apply to indices. Bloomberg writes Apple, Microsoft and Amazon each constitute more than 5% of the Russell 1000 Growth Index and collectively account for over 30% of the index’s market capitalization. Never has an accepted benchmark/index been this concentrated.
Interest rates are the largest component of most valuation models. I rhetorically ask what happens if the recent increase in pricing pressures is more structural than believed?
Maybe there is some merit to the nascent view that the 11% selloff in the NASDAQ 100 could be result of the August 27 change in Fed policy. Reiterating a September 10 headline, “The Volatility is about the Index, Not Single Stocks.”
Commenting on yesterday’s market action, the S & P faded late in the afternoon after a bipartisan group of 50 House members stimulus bill was rejected outright be House Democratic leaders. The NASDAQ reversed half of its gains with some stating the proverbial “stay at home stocks” will continue to lead.
Last night the foreign markets were mixed. London was down 0.19%, Paris down 0.05% and Frankfurt up 0.01%. China was down 0.36%, Japan up 0.09% and Hang Sang down 0.03%.
The Dow should open nominally higher ahead of the FOMC meeting. Oil is about 2.5% higher on a surprise drop in inventories. The 10-year is up 4/32 to yield 0.67%.