Stocks rose again yesterday although they finished off their best levels of the day. Federal Reserve Chair Jerome Powell testified before the House yesterday. His main message was that the Fed was monitoring the developing economic impact of the coronavirus and would adjust policies, if necessary, to combat any negative impact.
Not only was that the right message, it was one markets expected to hear. While stocks fell back a bit after Mr. Powell didn’t suggest more rate cuts sooner rather than later, this was not the right time to express any change in course. For one, the actual impact on our economy is still unknown. To date, there has been none. Obviously, American companies doing business in China are affected, and disrupted supply chains are likely to create some level of complications over the next several months. Markets had been pricing in at least one more rate cut in 2020. That is still a possibility, but it isn’t likely soon.
While the 10-year Treasury yield once again is below the current Federal Funds rate, the yield curve remained positively sloped until last fall when it inverted for a few months. There have been signs that the manufacturing recession might be ending, but that could change again as the impact of the virus spreads. The American consumer remains active and confident. He should, given the steady increase in jobs.
But all is not perfect. European economic data this week was disappointing. The number of jobs available has shrunk in recent months. And interest rates are declining along the entire curve. That could be a sign of increased demand for bonds. Money has flowed from equities to bonds in recent weeks, in part due to investor nervousness, in part due to profit taking, and in part due to portfolio rebalancing.
What is also disturbing is that leadership in the stock market continues to narrow. While the leadership itself has rotated a bit in recent weeks, a few robust stocks, like Tesla and Amazon, have pulled major averages higher. While neither Tesla nor Amazon is in the Dow, leadership there has been concentrated as well, led by ongoing gains in Microsoft# and a rebound in Boeing# in anticipation of the approval of the 737 MAX for flight sometime around mid-year.
Yesterday was the New Hampshire primary. Bernie Sanders and Pete Buttigieg again led the pack, but Amy Klobuchar made a strong third place showing and won some delegates as a result. Elizabeth Warren, who was the front runner a few months ago before she scared even liberal Democrats with some of her tax programs, was the night’s big loser along with Joe Biden. If Ms. Warren and Mr. Biden don’t regain momentum very quickly, they will be done, leaving just the top three plus Michael Bloomberg as the remaining candidates with any chance of winning the nomination. As we have seen by the rise and fall of Senator Warren over the past several months, anything can happen.
With that said, the progressive wing of the Democratic party, which so dominated the early going, is down to one flag bearer, Senator Sanders. A large majority of Democrats, foremost, want to select a candidate that can beat Donald Trump. Who that someone is remains an open question. At the moment, after last night, it appears that Mr. Buttigieg and Senator Klobuchar are the most logical alternatives, although neither has supporters with the level of enthusiasm as Sanders or Trump.
The stock market obviously fears a Sanders nomination the most. That means, in market terms, that his policies would be most adverse as far as earnings, interest rates, and currency valuations are concerned. Market reaction makes no statement about any non-economic issues. So, while progressives won last night, as Mr. Sanders won the most votes, the continued strength of Buttigieg and the rise of Klobuchar give investors some comfort that their worst fears might not come to pass.
Markets are still assuming that a Sanders nomination almost guarantees a Trump victory. But no one thought Trump would win at this point in 2016 either, even though he was at the front of the Republican leaderboard. In U.S. politics, nothing is impossible. With that said, even fewer expect socialism to overtake capitalism in the United States. While everyone assumes that the most extreme Sanders positions will never become law, directionally, he can make a big difference. While Bernie continues to invigorate the youth and the left, like Trump he shows few signs of expanding his base. Both leaders, Sanders and Trump, spend most of their time talking to their base. The wild enthusiasm each faces at their respective rallies is invigorating. It recharges their juices.
But the race, as always, is going to be won by the candidate that wins the center. President Trump realizes this and has begun to reach out, for instance, to the African-American community. He won’t win them over, but any dent is a step in the right direction. Neither polls strongly among white educated suburban women. How they vote will be key. Right now, they appear disenfranchised, much as they were in 2016. Democrats did a good job of winning their votes in the 2018 mid-term elections by selecting appealing Congressional candidates. While the 2020 race raises more questions than answers so far, markets today seem comforted that the race is still wide open.
Today, Bill Russell is 86. Some years ago, the decision was made to move most national holidays to Monday creating three-day weekends. Presidents Day is next Monday, commemorating the births of both Lincoln and Washington. Today is the actual birthday of Abraham Lincoln, born 210 years ago. How do you tell a boomer from a millennial? Boomers know Washington was born on February 22. Millennials don’t.
James M. Meyer, CFA 610-260-2220