Soothing Words From Powell Help Stocks – Momentum Lies With Bulls For Now

Fundamentals are still a suspect, but US stocks were treated with soothing comments from Fed chief last week. Bulls have the ball, but bears are likely to show up at $260 on SPY.

Speaking at the American Economic Association’s annual meeting last Friday, Jerome Powell, Fed chair, said he is “listening sensitively to the message that markets are sending,” about downside risks to the economy, adding “we will be prepared to adjust policy quickly”.

It took a decent selloff in US stocks for a change in his tone. In recent weeks, several other FOMC members – both voting and non-voting – have expressed similar dovish sentiment. Powell also said the Fed would not hesitate to use – again – the balance sheet as a tool, if the need be.

Post-financial crisis of a decade ago, the Fed launched quantitative easing (QE) three times. System Open Market Account (SOMA) holdings went from under $500 billion in December 2008 to $4.24 trillion in April 2017. In October that year, it began to run down its balance sheet. As of last Wednesday, SOMA holdings stood at $3.84 trillion (Chart 1). Major US equity indices did rise to new highs last year, but only to then come under pressure.The S&P 500 large cap index (2531.94) peaked at 2940.91 on September 21. By December 26, it dropped to 2346.58.In 2018, it fell 6.2 percent – the first annual drop since 2008.

Noticeably, Powell’s dovish comments came in the same day that December’s employment report showed the economy produced much-stronger-than-expected 312,000 non-farm jobs. In all of 2018, 2.6 million jobs were created, for a monthly average of 220,000 jobs – the highest monthly average since 2015. The unemployment rate in the last six months came in sub-four percent.The jobs picture is robust.

Wage growth has not quite shown the same momentum but has picked up speed in recent months. In December, average hourly earnings of private-sector employees rose $0.11 month-over-month to $27.48. Year-over-year, they were up 3.15 percent. This was the third consecutive monthly increase of three-plus percent. The last time wages grew with a three handle was in April 2009 (Chart 2). This is “quite welcome…for me at this time does not raise concerns about too high inflation,” Powell said.

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Disclaimer: This article is not intended to be, nor shall it be construed as, investment advice. Neither the information nor any opinion expressed here constitutes an offer to buy or sell any ...

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