What a Difference a Year Makes: Last 2019 Fed Mtg Wraps Up with Stocks Near Highs

The Fed decision today could be anti-climactic, with futures prices indicating virtually no chance of any policy changes. At the same time, the Dec. 15 tariff deadline gets closer.

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5 min read
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Key Takeaways

  • Trading could be thin, directionless ahead of Fed decision

  • No policy change expected, but Powell press conference, dot plot in view

  • Consumer prices rose 0.3% in November, slightly above expectations

(Wednesday Market Open) It was almost a year ago when a Fed meeting helped send stock indices plunging into bear or near-bear territory. The Fed’s decision back then to raise rates for a fourth time in 2018 put new interest rate fear into an already shaky market. By Christmas Eve, the S&P 500 Index (SPX) was down nearly 20% from its September high.

Things couldn’t be more different approaching today’s Fed meeting conclusion, when the futures market expects no policy changes and the Fed is coming off of three-consecutive rate cuts. The SPX is near all-time highs, up nearly 25% year-to-date. That shows you just how closely monetary policy can affect Wall Street. 

The major indices appeared to flatline Tuesday, and that carried over into Wednesday’s pre-market hours in what looks like a typical pre-Fed announcement trading atmosphere. It’s possible the slow, direction-less type of trading could last much of the day, until the Fed makes itself heard early this afternoon.

Things were pretty quiet early Wednesday on the China tariff front, but it’s possible any headline on that subject could wake up the market. The Dec. 15 tariff deadline is this Sunday and looms large. Some people think a Phase One deal could be announced before that, but speculating on timing hasn’t worked too often in this long trade war. 

Today’s data included the November Consumer Price Index (CPI), which rose 0.3%. That was a bit more steep than the 0.2% that analysts had expected, but below the 0.4% in October. Core CPI in November, which strips out volatile food and energy prices, climbed just 0.2%.

Watching Beige Paint Dry Ahead of Fed

So is today’s Fed meeting a non-event? Quite possibly. The futures market puts chances of a rate move pretty close to zero, so there’s not a lot of drama ahead of the 2 p.m. ET announcement. After that, Fed Chairman Jerome Powell takes the podium, and it’s hard to imagine what he could say that might move the market. 

The Fed has done such a good job of telegraphing its intentions this time around that it seems like there’s little Powell could say that people don’t already know. While there’s always the chance something new could come up, it wouldn’t be surprising to hear him go with another version of “We’re watching the numbers” and that downside economic risk still exists despite recent strong data.

Today’s Fed decision comes at an interesting juncture where the economy really seems to be hopping. The question is what Powell and the Fed will say about current events like strong holiday sales, last week’s amazing jobs report, and great housing numbers which investors saw confirmed by home builder Toll Brothers (TOL) earnings report earlier this week. It might be worth watching for any changes in the statement’s wording about the economy compared with what the Fed said after its last meeting. 

In the lead-up to today’s Fed announcement, trading on Tuesday was like watching beige paint dry. Most major indices traded both sides of unchanged most of the day before a late slide. There really wasn’t much of a pattern in the sector outcomes. Some of the defensive sectors rose while others fell, and the same goes for cyclicals. Financials, which typically have the most to gain or lose from Fed action, finished right at the flatline. Could that be a sign of the lack of excitement ahead of the Fed meeting? Very possible. 

Remember, this meeting brings an updated “dot plot” from Federal Open Market Committee (FOMC) members, mapping out where each of them sees rates going in the years ahead. That could be one interesting aspect of the meeting, and it’s probably worth a close comparison to the last dot plot to get a sense of where FOMC officials believe the economy might be headed. The Fed turned dovish in mid-2019. The dot plot might help chart whether the people making rate decisions expect that to last, but it’s likely going to show some projections for higher rates and some for lower. We’ll help you “connect the dots,” so to speak, in this afternoon’s report.

Stay tuned this afternoon for another Market Update after the Fed decision where we’ll discuss the possible market implications (or lack of implications) of the Fed’s latest words.

Jets and Pickups

In corporate news, meanwhile, Boeing (BA) announced November new orders Tuesday and it didn’t look particularly good for the jet maker. In fact, the data were pretty disappointing with 24 jets delivered, but the stock fell less than 1%. In general, BA shares have held up really well this year considering all the company’s been through. While you never want to forget the tragic events that occurred, it’s almost like the stock is made of teflon. Earlier this year, some analysts sounded like they thought investors would give up on BA shares, but that just hasn’t happened.

One question does come up: Will BA shares continue to avoid a selloff if the company freezes its dividend? A dividend freeze could be on BA’s to-do list, according to The Wall Street Journal. BA raised its dividend 20% last year. Investors could find out next week what will happen with the payout, the newspaper reported.

Speaking of payouts, Ford (F) now has a 6% yield. The stock is under $10, but when you look at 6% vs. the 10-year Treasury yield of 1.84% as of late Tuesday, that’s pretty dramatic. But keep in mind that a high dividend yield relative to treasuries can sometimes be a signal that a stock is at risk. 

That being said, TD Ameritrade clients were net-buyers of Ford (F) last month as the company announced plans for an electric F-150 pickup truck, according to the Investor Movement Index® (IMXSM). The IMX is TD Ameritrade’s proprietary, behavior-based index, aggregating Main Street investor positions and activity to measure what investors actually were doing and how they were positioned in the markets.

Meanwhile, TD Ameritrade clients were net-sellers of Ford competitor Tesla (TSLA), which is also in the news with an electric pickup truck. However, TSLA shares have been rolling right along lately with the stock recently hitting $350 a share for the first time in nearly a year. So maybe it’s not surprising to see some investors taking profit and perhaps moving a few dollars into a beaten-down auto stock like Ford.

CHART OF THE DAY: POUND OUT-BOWLING EURO: This three-month chart shows the British pound (GBP/USD-candlestick) has moved up against the dollar recently, while the euro’s (EUR/USD-purple line) generally marched in place. This week brings a European Central Bank (ECB) meeting and a UK parliamentary election that could have Brexit implications. Source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

From Cars to Beer—Trade Deal’s Potential Beneficiaries: Auto parts makers. Consumer products manufacturers. A railroad. Even a beer company. Those are some of the firms whose stocks might have the most to benefit from an agreement reached between Congress and President Trump on Tuesday to move forward on the United States-Mexico-Canada Agreement (USMCA), Briefing.com noted.

The six publicly-traded companies with the most exposure to Mexico and Canada include American Axle (AXL), a maker of auto drivetrain and driveline components and systems; railroad company Kansas City Southern (KSU); auto parts manufacturer Magna International (MGA); consumer product maker Colgate-Palmolive (CL); Molson Coors Brewing Company (TAP), and agricultural manufacturing firm AGCO (AGCO), according to a list from Briefing.com. These companies’ exposure to Mexico and Canada range from 24% for AGCO to 53% for AXL. All of their stocks might be worth a close watch for any impact, but looking at their year-to-date charts, the action is all over the place. They definitely don’t move in step. Overall for the market, having a deal in place would probably be positive, in part because it removes a source of uncertainty. Markets tend to dislike uncertainty. 

You’re All Playing for Second Place Now: In this space we often discuss the market cap race—typically about how Apple (AAPL) and Microsoft (MSFT) have been duking it out over the past year to claim the top spot, while Alphabet (GOOGL) and Amazon (AMZN) nip at their heels in the third and fourth spots. They all dropped one notch this week with the IPO of Saudi Aramco. In its first day of trading, shares climbed to the trading limit—up 10%—which puts the oil giant's market cap just south of $1.9 trillion. AAPL and MSFT have market caps in the $1.2 trillion range, and GOOGL and AMZN have current values in the $900 billion range. In other words, the top spot seems to be sewn up for the time being. It's worth noting, however, that Saudi Aramco's valuation does have a bit of an asterisk, in that the small free float—only 1.5% of the company was released in the IPO—is among the tiniest percentages among all publicly-held companies in the world, according to Bloomberg.  In contrast, independent shareholders control over 80% of each of the top-four U.S. firms. Some 98% of MSFT shares are held by the public.

MVP Candidate Slumps: While “FAANGs” still get attention, other buckets of stocks have often stolen their thunder this year. That includes the online payment companies like PayPal (PYPL) and Square (SQ), as well as credit card behemoths. The full name for the payment basket is MVP, which stands for MasterCard (MA), Visa (V), and PYPL. When consumers feel positive about the economy, they tend to buy more things with credit.

Some MVP names are doing great, but SQ has generally has had a tough time since its August earnings report when the company missed analysts’ expectations for gross payments volume for the second straight quarter and delivered lower-than-expected earnings-per-share guidance for Q3. Earnings in Q3 looked more solid, with SQ beating expectations. That’s helped shares a bit. But they’re still down nearly 15% from the 52-week high. SQ remains very popular in some sectors of the economy. Most cab drivers seem to use it, for instance. In this kind of economy where consumers are so healthy, it seems like a time when payment stocks might thrive. However, if SQ can’t get off the runway in today’s consumer environment, that raises the question of what kind of economy it needs to take flight.

Good Trading,

JJ

@TDAJJKinahan

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This week's economic calendar. Source: Briefing.com
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Key Takeaways

  • Trading could be thin, directionless ahead of Fed decision

  • No policy change expected, but Powell press conference, dot plot in view

  • Consumer prices rose 0.3% in November, slightly above expectations

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