Despite seven years of economic “recovery” since the financial crisis of 2008, the Fed and other central banks are still the single most important influence on US and global stock markets.
Don’t take my word for it, just look at the last three months:
- The surprise yuan devaluation by China’s Central Bank on August 12th ignited the worst sell off in nearly 4 years as the S&P 500 dropped 11% in just five trading days.
- On September 17th, the Fed disappointed markets by not raising rates, signaling it wasn’t confident enough in the US economy. The S&P 500 dropped 7% over the next eight trading days.
- Last week, the European Central Bank hinted at more QE and ignited a massive rally in global stocks (the S&P 500 rose 2% in one day).
- This past Friday, China’s Central Bank again surprised markets by cutting interest rates 25 basis points, causing US stocks to hit 3 month highs.
Point being, all of us are at the mercy of these central bank actions, and diversification and classic asset allocation practices simply don’t work in these central bank driven markets.
With another potentially market moving Fed decision looming just 24 hours from now, if you don’t understand what central banks are doing, then you and your clients are at a disadvantage.
Today, sophisticated, high net worth investors are asking their advisors (or prospective advisors):
“What Do You Think the Fed Will Do Tomorrow?”
We make sure that our paid subscribers can quickly, directly and intelligently answer that question, without having to do the hours of research needed to get the information that impresses these high net worth investors and prospects. We do that research for them, and deliver the key points every trading day at 7AM.
Over the past three months, paid subscribers to The Sevens Report have had the central bank analysis needed to successfully navigate these markets:
- On August 12th, the day Chinese authorities surprisingly devalued the yuan, we told paid subscribers that the move by the Chinese central bank represented a new, material negative that was going to further rattle markets. We identified an inverse ETF to hedge China exposure that rose more than 20% over the next two weeks as global markets collapsed.
- On September 17th, in our FOMC Preview, we provided three scenarios (Good, Bad and Ugly) and clearly explained that if the Fed did not raise rates (the Bad scenario) that the market would decline. The S&P 500 fell 7% over the next 8 trading days.
- On October 16th, we alerted subscribers to “dovish” comments made by ECB Governing Council Member Benoit Coeure, and said the chances of more QE form the ECB were rising and that was good for our preferred “Europe” ETF. Since then, the ECB has nearly guaranteed more QE and that ETF has risen 5.2% in less than two weeks!
- On October 20th, (one week ago) we included a special section in the paid edition of The Sevens Report titled “Three Macro Takeaways from the Chinese Data.” In it, we laid out what further easing was expected from Chinese authorities by markets, and specifically sighted 1) a 25 basis point rate cut, and 2) a 50 basis point reserve ratio cut. Both of those actions were taken by Chinese authorities Friday!
In today’s issue of The Sevens Report, we included an FOMC Preview that spells out for our paid subscribers:
- What’s expected from the Fed tomorrow.
- What will make the statement “hawkish” or “dovish” (There is a specific paragraph everyone will be watching) and
- What the likely market reaction will be depending on whether the statement will be “hawkish” or “Dovish.”
They received this content at 7 AM this morning and already had the chance to send it to sophisticated, high net worth clients and prospects. We’ve included an excerpt of that research below:
FOMC Preview (Sevens Report Excerpt)
The focus for Wednesday is: How much does the Fed telegraph whether it intends to hike in December?
Given that, the first few sentences of the second paragraph of the FOMC statement will be the most important.
In September, the Fed added language into that second paragraph highlighting the risks from “recent global economic and financial developments.” So, what will make this statement dovish or hawkish will be whether that specific language is softened, or whether it remains the same.
By softening the language, we mean a change to something like, “recent global economic and financial developments have improved, but still pose a risk and need to be monitored.” If a change like that is made, it will be mildly hawkish, and odds of a December rate hike will rise.
If the entire, “recent global economic and financial developments” sentence is removed, that will be very hawkish, but that’s a very, very low probability.
Common sense would tell us that the language needs to be softened, as the macro environment has clearly improved and the stock market is way up since September, but this is the Fed—so it’s not a sure thing.
Outside of that second paragraph, there will likely be minimal changes to the statement, and on the whole we do not expect the Fed to offer any additional guidance regarding the timing of a rate hike.
Wildcard to Watch: Labor Market Commentary
Last meeting the Fed said the labor market “continued to improve, with solid job gains and declining underemployment.” Since then we had another underwhelming jobs report (September) so there is the chance for a downgrade to the labor market language, which would be modestly dovish. Conversely, if the Fed makes no change to that statement, it’s clear that it views the temporary dip in the jobs data as temporary, and that will be slightly hawkish.
Potential Market Reaction: This FOMC meeting likely will be a non-event and the FOMC statement shouldn’t contain any surprises, as the Fed will want to keep flexibility for either a December or a March hike. But, if there is risk into this meeting it is that the statement is slightly hawkish, solely because of the current very low level of interest rates.
If the Fed is serious about a rate hike this year, then it needs to begin preparing the market, because the bond market is not at all priced for a hike, and a surprise could be disruptive. This is what happens when the Fed keeps moving the goal posts—all hawkish rhetoric by Fed leadership is now being quasi-ignored. If they want to keep the flexibility to hike in December, they better start officially hinting at it now.
Finally, if the Fed is very dovish tomorrow (downgrades the labor market language and doesn’t soften the international commentary) expect to hear the term “Negative Interest Rates” a lot more.
Expected “Hawkish” Market Reaction. Stocks decline, rally in the dollar and sharp drop in bonds and commodities (with bonds potentially reacting with the most volatility).
Expected “Dovish” Market Reaction. Stocks flat (potentially a short-term pop but not a lasting one), sharp dollar decline, commodities rally sharply, bonds rally modestly.
If We Don’t Get the Fed Right, Nothing Else Matters
Understanding the Fed and its effect on stocks is now more than critically important to client portfolios, because if the Fed does not show some confidence and suggest they are still on pace to raise rates by year end, then this market will likely break in a big way.
So, you need to understand the Fed to protect client portfolios.
We understand the Fed because we spend hours monitoring and analyzing:
- Comments by Fed Governors
- Research Papers from the Fed
- Key Economic data the Fed uses to make policy decision
- Key bond market signals that tell us what the market thinks of the Fed and,
- FOMC Meetings and Official Releases like the FOMC Minutes
We take the time to study the Fed so our subscribers don’t have to.
Our job in tough markets like this is to eliminate the information overload and deliver the unemotional fundamental and technical analysis that can help our paid subscribers reassure clients, protect portfolios and seize opportunities across asset classes:
And we are delivering this macro research each day at 7 AM because this is a quickly changing landscape and waiting a few days for a macro update from the firm’s CIO or global strategy team simply isn’t going to cut it.
This is a unique time, because the market is starting to lose confidence in the Fed. If that continues (starting with tomorrow’s meeting) than that will have significant negative implications for stocks, and we will be vigilant to that risk and will alert our paid subscribers Thursday morning at 7 AM if the Fed decision tomorrow increases the chances of another market sell off.
We are committed to making sure that our paid subscribers have the timely, accurate Fed analysis they need to:
- Alter broad asset allocations if stocks break down
- Identify and buy hedges to protect portfolios
- Know when it’s safe to expand risk tolerance
Subscribe to The Sevens Report today and make sure you’ve got an independent, knowledgeable analyst team working to give you the “Need to Know” on all global central banks, because the simple fact is that they remain totally in control of this market, and if you don’t get the central banks right, it’s nearly impossible to outperform for your clients.
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