Posted |

As expected, Janet Yellen's Fed announced yesterday that their QE bond-buying program was coming to an end. The move was widely telegraphed and could be viewed as a positive since the Fed no longer thinks the economy is weak enough to require the Fed's help.

To support the relatively upbeat view of the economy, the statement released by the FOMC led off with an acknowledgement of the improvement in the jobs market. Specifically, the Fed wrote, "Labor market conditions improved somewhat further, with solid job gains and a lower unemployment rate."

In addition, the FOMC statement said that "a range of labor market indicators suggests that underutilization of labor resources is gradually diminishing." In Fed-speak, this too was considered an upgrade to the labor market.

Remember, the Fed has what is called a "dual mandate," meaning that they really have two jobs: full employment (i.e. the unemployment rate) and price stability (inflation). So, one key takeaway from the Fed statement yesterday is that the Fed believes it is getting somewhere on the first goal.

The FOMC basically said as much via the line in the statement which read, "The Committee judges that there has been a substantial improvement in the outlook for the labor market since the inception of its current asset purchase program."

What's the Problem?

Stocks initially sold off on the release of the Fed's statement. And although a late rally kept the losses to a minimum, futures then immediately retreated after the close and are pointing lower again in the early going today.

So what gives? Why would stocks move lower in response to the Fed saying things are looking up?

The key to the current pullback appears to be fairly straightforward. You see, the fast money masters of the universe have decreed that the FOMC statement was "more hawkish" than had been expected. And remember, Wall Street does NOT like surprises - especially coming from the Fed.

In English, the takeaway from the FOMC statement is that the Fed may need to turn from being "dovish" toward the economy (i.e. lending a stimulative hand) to being more "hawkish" on the inflation front (making sure that inflation stays at or below their 2% target). And if the latter is the case, then the fear is that rates will need to begin to rise sooner than currently anticipated.

Apparently, traders had expected another warm and fuzzy statement from Ms. Yellen's bunch. Given that Fed Governors such as James Bullard, who tends to lean toward being an inflation hawk, had recently stated that the Fed could delay the end of QE or even do more if the economy shows signs of weakness, traders expected the FOMC statement to show more concern about the potential downside risks stemming from Europe.

Although Ms. Yellen's gang of central bankers did say that rates would remain at their current levels for a "considerable time," the real key here is the view that the Fed became "incrementally more hawkish" with yesterday's statement.

It's All About Inflation Now

Perhaps the key takeaway from the Fed's statement is that the committee's focus is now squarely on inflation. And as such, the most important line in the statement was, "Although inflation in the near term will likely be held down by lower energy prices and other factors, the Committee judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year."

While this language sounds tame enough, traders took it to mean that the Fed may be more concerned about inflation than they have been. And as a result, rates may need to rise sooner than the street currently expects.

On the topic of rates, the Fed's statement made it clear that the FOMC will remain "data dependent." And if one reads the entire statement they will probably come away with something along the lines of, "Okay, that makes sense."

Cutting to the chase, the Fed is saying that they want to err on the side of caution and keep rates low for a "considerable time." But, they are also saying hey, if the economy and/or inflation expectations start to heat up, we're going to have to do our jobs and take some action. Which, to those with an objective view, would seem to be logical.

One More Thing

If you are still wondering why traders and their computers might see any of this as being negative, there is one more thing to keep in mind at this stage of the game. Lest we forget, the market has run an awfully long way in a VERY short period of time.

And as the chart below shows, there is now important resistance overhead as the S&P approaches its all-time highs.

S&P 500 - Daily

View Larger Image

So, in light of the fact that the S&P had popped up 9 percent in 9 days off the intraday low, with much of the gain fueled by Fed-speak both at home and across the pond, a period of backing and filling is probably in order until traders can figure out whether or not the improvement in the economy is a good thing.

Turning To This Morning

The news flow has been fairly quiet so far this morning as traders remain focused on the implications from yesterday's FOMC statement. The bottom line here is that the Fed's position was viewed as being more hawkish than had been expected. As such, traders worry that interest rates will need to rise sooner than expected. On the front, rates did rise after the Fed released its statement. In other news, the European Banking Authority said that today that banks should not feel too secure following ECB stress tests. As a result, European bourses are down hard today. Here at home, the focus is on the GDP report, which came in above expectations and futures are pointing to a weak open on Wall Street.

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

Major Foreign Markets:
    Japan: +0.67%
    Hong Kong: -0.49%
    Shanghai: +0.76%
    London: -0.85%
    Germany: -1.50%
    France: -1.01%
    Italy: -2.04%
    Spain: -2.02%

Crude Oil Futures: -$0.83 to $81.37

Gold: -$22.20 at $1202.70

Dollar: higher against the yen and pound, lower vs. euro

10-Year Bond Yield: Currently trading at 2.310%

Stock Indices in U.S. (relative to fair value):
    S&P 500: -9.10
    Dow Jones Industrial Average: -14
    NASDAQ Composite: -24.85

Thought For The Day:

It is best to deal with your problems before they deal with your happiness. --Unknown

Important Reminder: In order to keep pace with our growth, better serve our advisors and clients, and to provide scale for future growth, Heritage is teaming up with CONCERT Global - an SEC Registered Investment Advisor with more than $2 Billion in assets under management. CONCERT will provide more robust back-office, compliance, technology, and trading infrastructure. Client packets to make the transition will be arriving in the coming weeks.

Positions in securities mentioned: None

Wishing you green screens and all the best for a great day,

David D. Moenning
President, Chief Investment Officer
Heritage Capital Research
Check Out the NEW Website!

Investment Advisory Services Offered Through CONCERT Wealth Management, Inc. An SEC Registered Investment Advisor


The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

David D. Moenning, an advisor representative of CONCERT Wealth Management Inc. (CONCERT), is founder of Heritage Capital Advisors LLC, a legal business entity doing business as Heritage Capital Research (Heritage). Advisory services are offered through CONCERT Wealth Management, Inc., an SEC registered investment advisor. For a complete description of investment risks, fees and services review the CONCERT firm brochure (ADV Part 2) which is available from your Investment Representative or by contacting Heritage or CONCERT.

Mr. Moenning is also the owner of Heritage Capital Management (HCM) a state-registered investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Neither HCM, Heritage, or CONCERT is registered as a broker-dealer.

Employees and affiliates of Heritage and HCM may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or Heritage/HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice.

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.