THE ELECTION, FED POLICY AND VALUES

I do not think it is an understatement to write the next two months might be one of the most contentious Presidential election season in decades. Drama will be great as COVID is the driving political issue. There are fears that changes to balloting may fuel legal challenges that could stall the outcome for days or weeks.

Perhaps one the greatest changes that occurred, partially the result of COVID, is the change in monetary policy where the Fed will be adopting “a flexible form of average inflation targeting,” a policy that is expected to include additional policy stimulus in the form of stronger forward guidance and possibly additional asset purchases. The Fed has ruled out negative interest rates.

This new average inflation target states that the Committee will allow an inflation rate above 2% for some time, a policy statement in my view is deliberately vague for Powell did not clarify how high inflation would need to get before the FOMC becomes uncomfortable.

Another major change is how the Fed will now interpret its maximum employment goal as a “broad based and inclusive goal.” Some are interpreting this change that rather than focusing solely on the aggregate unemployment rate, the Committee will take into account how low income and minority market participants are faring.

Those who adopt this view are fearful that the Central Bank is repeating monetary policy mistakes of the late 1960s and early 1970s as the Committee at that time was intimately involved in the “philosophic and political currents that were transforming American life and culture” as per Capitol Economics. Similar to that era, the Fed today is less focused on controlling inflation. Will the same results occur?

I rhetorically ask is the Fed attempting to get ahead of the inflationary expectations proactively warning that it will tolerate rising price pressures? Recent data is suggesting inflationary prices are rising but the question is whether or not this temporary.

The answer to this question will be pivotal in determining market direction. The Fed might tolerate rising inflation but will the markets?

To write the obvious the NASDAQ has been encouraged by Fed action. As written last week the advance has been predicated upon an extremely accommodative Fed not a strong economy.

Bloomberg wrote as of Friday the value of all US stocks relative economic output has eclipsed the record levels achieved during the dotcom bubble. The universe as measured by the Wilshire 5000 is 190% greater than the total GDP. The pervious record was 167% in March 2000.

Such is an ominous warning sign but is further exacerbated by the massive amount of monies concentrated in a few names versus 50 plus names in March 2000.

For what it is worth department, CNBC reported on Friday 20 of the 30 Dow Jones stocks are still negative for 2020, eight of which are down anywhere between 25% and 45%. Wow!

Bloomberg writes the current monthly underperformance of the equal weighted S& P500 versus the S & P 500 is the largest since June 2000.

Perhaps even more astonishing, according to Bank America, US tech stocks are now worth more than the entire market capitalization of all European markets. In 20007 the European market was four times the larger than US tech stocks. Wow!

This week’s economic calendar is crowded, ending with the August labor report.

Last night the foreign markets were mixed. London was down 0.61%, Paris up 0.67% and Frankfurt up 0.50%. China was down 0.22%, Japan up 1.12% and Hang Sang down 0.96%.

The Dow should open flat. The 10-year is off 5/32 to yield 0.74%.

 

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.