The Fed Disappoints Again
The Fed disappoints again... FedEx warns... A troubling sign for the economy...
It's becoming a familiar story...
In recent months, the broad U.S. markets have rallied prior to each of the Federal Reserve's policy announcements, only to reverse and close sharply lower after. And today was no exception...
After rallying as much as 1.1% this morning, the S&P 500 closed down more than 1.5% after the Fed's decision. The Dow swung from a gain of more than 300 points to a loss of 350. And the tech-heavy Nasdaq again led the way, closing down more than 2% for the day.
For its part, the Fed's announcement was no great surprise...
As markets largely expected, officials voted unanimously to raise short-term interest rates another 0.25 percentage points to a range of 2.25%-2.50%. And as several Fed members had hinted at recently, it also signaled that it will likely stop hiking rates sooner than expected next year. As the Wall Street Journal reported...
The projections showed 11 of 17 officials expect the Fed will need to raise rates no more than two times next year, compared to seven out of 16 officials in September. Just six officials expect the Fed will need to raise rates three times or more, down from nine officials in September, and six officials believe the Fed may need to raise rates no more than once, up from three officials in September. Officials penciled in one more rate increase in 2020.
Their median projection of the neutral interest rate – a level that neither spurs nor slows growth – edged down to 2.75% from 3%. The latest increase leaves the Fed roughly one interest rate move away from that neutral setting.
However, as we mentioned, the markets clearly weren't pleased...
Perhaps they were expecting an even more "dovish" forecast for next year. Or perhaps they didn't love Fed Chairman Jerome Powell's comments that economic growth and inflation were likely to be slightly weaker than the Fed expected a few months ago.
Regardless, today's reaction reminded us of a comment from famed short-seller Jim Chanos late last week. In an interview with financial-news network CNBC, Chanos noted questioned the health of both the stock market and the economy if rates which are still historically low are already causing problems...
"One of the things that worries me is just how fragile we seem to be to small rises in interest rates," Chanos told CNBC's Sarah Eisen. "If I were to tell you that nominal GDP growth recently was 6%, with record low unemployment – and good jobs numbers, good wage numbers – and you say 'Gee! We're having a problem with 3% interest rates,' you'd say that's – you know – what kind of fragility [is] in the system?"
Chanos, who spoke from the Yale CEO Summit in New York, referenced the recent rise of the 10-year Treasury note yield above 3%...
"In interest rate-sensitive industries, we're talking about what a slowdown they've seen in the last two months in their business," Chanos said. "Something seems to me a little bit off that if, eight or nine years into a recovery, we can't handle a 10-year – which normally trades a full point below nominal GDP – that would be 5%. If rates went to 5 percent, people would probably lose their minds."
Of course, Chanos was referring to long-term interest rates rather than the short-term rates the Fed controls...
But the sentiment applies... Previous Fed tightening cycles have ended with short-term rates well above 4%. If rates at roughly half those levels are already causing problems for stocks and the economy – again, nearly 10 years into the "recovery" – what kind of recovery was it really?
Speaking of the economy...
If the latest report from global shipping giant FedEx (FDX) is any indication, it could be even weaker than we realized.
As longtime readers may recall, we consider the company something of a bellwether of the world economy.
The thinking goes, if FedEx is shipping more packages around the world, the economy is probably doing OK, and vice versa. And according to FedEx, business is slowing dramatically. As news service Reuters reported this morning...
Shares of FedEx fell nearly 8% on Wednesday, after the delivery package company jolted investors with a steeper-than-expected cut in its 2019 profit forecast warning of weakening freight demand as the global economy slows.
[The company] flagged a host of macro-economic issues including a Brexit-led UK slowdown, Germany's recent gross domestic product contraction, protests in France and slowing China demand due to an ongoing trade spat with the United States...
FedEx on Tuesday cut its fiscal 2019 adjusted earnings forecast to a range of $15.50 to $16.60 per share from a range of $17.20 to $17.80.
Wall Street analysts were completely surprised by the size of these cuts. According to Reuters, at least four brokerages slashed their price targets on the stocks by $25 or more. Meanwhile, analysts at Morgan Stanley called the news "jarring" – typical of what might be seen in a "severe recession" – and said it suggests the global economy could slow significantly next year.
Shares plunged more than 12% on the news today...
As you can see, they're now trading at their lowest levels in more than two years...
This is concerning. For months now, we've been seeing signs of economic weakness in both Asia and Europe.
But the troubles at FedEx – and the terrible performance of its stock of late – suggest this weakness is spreading and is now beginning to weigh on the U.S. as well. And alongside several other warning signs we've been tracking, it suggests the risk of a bear market is rising.
Given our repeated warnings to be cautious, we hope most Digest readers are weathering this sell-off just fine. But if you still haven't taken our advice to raise some extra cash and to "hedge" your portfolio with a few short sales or long put options, it's not too late to do so now.
New 52-week highs (as of 12/18/18): short position in SPDR S&P 500 Fund (SPY).
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