The near term market outlook for Mueller Time: sideways.
The market might take a hit from Thursday’s release of a redacted Mueller Report on whether Trump obstructed justice or colluded with the Russians or not. Barring a bombshell that everyone can agree is a bombshell, then any market slide will be temporary. The Fed will keep this market alive.
For starters, Robert Mueller supposedly said in the report that he lacked the confidence to totally clear Trump on numerous obstruction of justice matters. But Attorney General William Barr and his deputy Rod Rosenstein, hardly someone in Trump’s back pocket, said those obstructions were not criminal.
Washington will keep this story alive until the election anyway and Wall Street knows it. Unless Barr outright lied about Trump’s dealings with Russians in the 2016 Presidential campaign, there is no bombshell and the market will continue apace, fueled by a defanged Jerome Powell’s Federal Reserve.
As everyone knows, the year started off with investors expected two to four rate hikes. Now there are none. Stocks have risen ever since. Investor, business and consumer sentiment remains strong. For once, the Fed might not kill a growing economy.
“Unless there is an acceleration in wages, then we are good on rates,” says Scott Clemons, chief investment strategist for Brown Brothers Harriman. “Let it ride.”
On Monday, Chicago Fed Chief Charles Evans — a dove who votes on the Fed’s open markets committee this year and next — said he saw no reason to move on rates until fall 2020.
Evans also added that interest rates could move either way, up or down, which is highly vague, not to mention obvious.
“We believe rates are more likely to move lower if anything,” says Vladimir Signorelli, head of Brettonwoods Research in New Jersey.
Then there is St. Louis Fed Chief Jim Bullard who last week said that normalization of interest rates is now over.
Good bye 4% Treasury yields, a number many believed was right around the corner just three short months ago. For the uber-dovish Bullard, his concern is in a sustained inversion of the yield curve, often a precursor to a recession.
Only sourpuss bears see a recession at this point. Despite a very late business cycle, and a 10 year record-breaking economic expansion that started with the Fed in the Obama presidency, the base case is a slower economy, but not a contracting one.
JP Morgan CEO Jamie Dimon said last week he saw no signs of a slowdown. And with the Fed on pause, it’s even clearer to see a stable-to-growing economy at least until Trump’s last year in office.
Whether or not that helps him remains to be seen.
Trump criticized Powell in November and December, saying his rate hikes were erasing fiscal stimulus signed into law in Trump’s first year. Many cried foul, saying he was interfering with the Fed’s independence. Then in January, during a conversation with former Fed leaders Janet Yellen and Ben Bernanke at the American Economic Association’s annual meeting in Atlanta, Powell looked the odd-man out. Both Yellen and Bernanke said economic growth cycles don’t just die on their own, they are killed by the Fed.
The Fed’s hawkish camp is in being dismantled.
The latest dovish rhetoric comes on the heels of a much more assertive Larry Kudlow, Trump’s economic advisor, who now argues for a rate cut.
