01 Mar WILL MONETARY POLICY EXPECTATIONS CHANGE YET AGAIN?
It is widely accepted a major catalyst for the December rout was monetary policy and the Fed’s well telegraphed intentions of shrinking its balance sheet.
It is also widely accepted the reason for the current rebound was/is a pause in monetary policy and the ending of the Fed’s plan to unwind its $4 trillion balance sheet back to the pre crisis level of less than $800 billion. [Note: It was believed the unwinding would not impact the markets and only $500 billion was unwound in eighteen months via maturities and sales]
The initial print of fourth quarter GDP was released indicating the economy expanded by a 2.6% pace. Analysts had expected a 2.2% growth rate. Nonresidential business investment which is spending on equipment and software surged 6.2%. This spending increase is in direct contradiction to that of sagging durable goods orders. It also suggests underlying strength in spending that will increase productivity and support continued growth.
Speaking of contradictions, consumption rose by 2.8%, slightly below forecasts but validates views that December’s retail sales data indicating a sharp contraction is highly questionable.
The report shows that full year GDP growth is 3.1%, for the first time since the economy expanded at this rate since 2005 according to Bloomberg.
A pivotal question at hand is whether or not 2018 was an outlier and the economy will soon slow back to the economy’s long run potential rate of 1.9% or was it the return to the old normal? Until five years ago, the expected long term expected rate of GDP was 3.0%. The Federal Reserve is expecting a 2.3% growth rate for 2019.
I reiterate my belief the economy will continue to grow at a pace greater than expected because of job gains, rising home prices and increased business investment. In eras past, such has been the environment for three plus percent growth.
To write the obvious, economic growth has direct correlation to interest rates. Historically current growth rates equates with a 4.25% to 4.5% 10 year Treasury yield. I will continue to argue a major reason for “well anchored inflationary expectations” is muted owners’ equivalent rent and wage gains. Such comprise over 40% of inflationary indices. Wage gains are already at a 10-year high albeit the gains are muted. OER is still inching along the bottom.
If either accelerates, the odds increase of yet another change in monetary expectations.
Radically changing topics, the concentration of funds in a handful names is historic. Goldman writes the 10 top holdings made up over 70% of funds’ long positons, the highest since at least 2002. The five stocks that appeared most frequently are Amazon, Microsoft, Google, Facebook and Alibaba. Performance to date has been driven entirely by these names as per Goldman.
Concentrated positons are not new. Warren Buffet’s top ten holdings comprise 79% of its publically traded stock positons. It is the concentration in the same names which is unique, the result of all chasing returns.
An old axiom on Wall Street is once everyone adopts a trading strategy or owns the same stocks that strategy will soon falter. As widely noted during the past 18 months many “fail safe” strategies have imploded, the result of many following the same investment path. The only strategy that is now working is chasing the mega size technology companies, a point evidenced by the massive ownership of these companies by both hedge funds and ETFs.
Commenting about yesterday’s market action, equities were quietly flat. Treasuries dropped about ½ point.
Last night the foreign markets were up. London was up 0.53%, Paris up 0.66% and Frankfurt up 1.22%. China was up 1.80%,Japan up 1.02% and Hang Sang up 0.63%.
The Dow should open moderately higher on improved economic outlook from China and improving prospects of a trade deal. The 10-year is off 5/32 to yield 2.74%.