It is hard to say what realistic outcome would’ve made Wall Street happy with regards to the latest Federal Reserve policy statement.
People were clearly looking for Santa Claus at the press conference instead of Fed Chairman Jerome Powell. Anyone who has been watching the Fed knows they are clearly two separate people.
After all, Santa Claus is all about miracles and holiday cheer. Jerome Powell’s mission revolves around keeping a strong economy from overheating.
Although Fed love is tough love, this actually is what investors who aren’t children cherish most of all in the long run.
Those bargain stocks are the real gifts of the season. I’ll talk more about them soon, but first I need to discuss the Fed’s no-nonsense gift of clarity for the holidays.
The 0.25 percent rate hike didn’t come as a surprise to any of us. Futures markets had locked it in as an even money bet back on June 14. By Dec. 14, the odds of the Fed relenting were below 1 in 20.
While this was the outcome that all the economic numbers led us to expect, it clearly wasn’t the one a lot of investors were innocently or desperately hoping to see.
It has been a stressful season without a lot of reasons to cheer. A little rate relief would’ve been the miracle that the investors who had lost faith in their stocks thought they needed.
Seeing the Light
We never lost that faith and neither did the Fed. Powell doesn’t see any sign that the economy is going over a cliff. If he did, he would’ve voted to pause the tightening cycle to relieve the pressure.
Even now, central bankers are tracking 2 percent gross domestic product (GDP) growth for years to come, give or take a little natural short-term noise around the numbers. Keep in mind, that’s in the face of the highest overnight interest rate increase in over a decade.
However, consider the fact that back when the economy was on zero-rate life support, 2 percent was the long-term growth ceiling. The people with the best 360-degree view of the economy are reasonably confident that the level of growth can continue now that the easy money has been taken away.
Powell says rates are on the low end of neutral now. The economy is finally coming off life support, ready to breathe on its own without constant stimulus.
That’s huge. And if that growth forecast frightens you, I want you to ask yourself whether stocks were a buy during that long 2 percent era and what’s changed since then.
That pulse of growth was enough to make my subscribers happy. We spent our time reaching for faster growth rates in my GameChangers service and elsewhere.
After all, if the macroeconomic trend gives you 2 percent, it’s bullish enough for people who stay close to the index funds. My focus is on squeezing extra percentage points out of every year we have to trade.
But 2 percent isn’t bad. And if Powell and his fellow central bankers think we’re going back to that environment, it’s far from the end of the world.
If growth falters, there’s room on the rate curve now for real stimulus to stave off a full-fledged recession. In the meantime, the Fed’s eyes are clear.
Tariffs aren’t a concern for them. They’ve watched every nuance of the economy all year and trade policy hasn’t signaled that they have become a problem.
The domestic economy isn’t a concern either. The only thing that’s dimmed the Fed’s outlook is that overseas conditions are slowing economic activity back here in the United States.
The Best Gift of All
While that’s not the candy-coated assessment some were desperate to hear, I find it extremely reassuring.
The Fed is paying attention. Pausing the rate cycle early would’ve revealed that Fed officials either have adopted an arbitrary (and ultimately dangerous) policy of irrational exuberance or that they see serious cracks in the economy.
Business as usual at the Fed is serious business. Fed leaders don’t deal in hope and they don’t really care about our dreams.
They aren’t our friends. They aren’t protective parents. They aren’t Santa Claus. They’re bankers looking to keep money moving at optimum speed.
Even in that framework, they admit that rates have practically peaked unless inflation picks up. There’s no reason to tighten again otherwise.
Future markets already reflect this. Indeed, institutional investors now think the odds of one more rate hike in 2019 have dropped to 50-50. Meanwhile, anything more aggressive is vanishingly unlikely.
If so, the Fed isn’t going to be a drag any more. People who want to sell the best economic environment in a decade will need to find another excuse.
We can’t stop them. But we can remain in position to exploit their weakness as the market pendulum swings. My subscribers have been buying Big Tech at levels I had thought we’d never be able to get again.
These aren’t companies under a cloud like Facebook (NASDAQ:FB). We’re talking about the linchpins of the global economy as their earnings are growing 15 percent or more in a world where profits may struggle to ramp up at half that rate.
One of these stocks in particular has been pushed to a six-month low even though their company’s earnings outlook hasn’t deteriorated. While its projected to come up 4 percent for 2019, my model shows twice that much earnings growth in 2020.
Back in June, people were buying the company for 24X 2019 earnings. Now, that improved growth curve is on sale at a 22X multiple.
That’s a winning bet. And while I’d normally save it for my subscribers, because it’s the holidays and we’ve all had a rough month, it’s my gift to you: Microsoft (NASDAQ:MSFT). Buy the dip.