Make no mistake about it; this stock market continues to care about interest rates, inflation and what I refer to as "Fed Expectations." In short, yesterday's sudden drop of 300 Dow points confirmed this point. Well, to a certain degree, anyway.

In case you were napping, on an airplane, or otherwise occupied, the financial markets reacted to Jerome Powell's comments to the House Financial Services Committee yesterday with a fair amount of red numbers into the close.

Although the new Fed Chairman didn't say anything that really out of left field or surprised the markets in any meaningful way, traders appear to have been positioning themselves for a more dovish Powell. But instead, they got a more pragmatic Powell as well as the gentle hint that the Fed may need to look at a fourth rate hike in 2018. To which, I'd like to respond with, "Yep, that makes sense."

More specifically, Powell said the economy is in pretty good shape. "What we've seen is incoming data that suggests a strengthening in the economy. We've seen continuing strength in the labor market... We've also seen continued strength around the globe," the Fedhead said in prepared testimony Tuesday.

On the subject of inflation, Powell suggested that the Fed may be close to achieving their targets. "We've seen some data that will, in my case, add some confidence to my view that inflation is moving up to target," he noted.

None of the above is new. And none of the above is really surprising. No, it was Powell's thoughts on what the Fed may need to do next that seemed to get the algos moving.

While I'm summarizing here (it's not as dark outside my hotel room as it should be, so I'm likely running out of time), Powell basically reminded everyone that members of the FOMC will be making new projections at the March meeting. Powell also suggested that those projections are likely to be influenced by fiscal policy and how the economy reacts to the new tax reform/stimulus measures.

Powell basically warned that they need to look at the data with an open mind. "I wouldn't want to prejudge that new set of projections, but we'll be taking into account everything that's happened since December," Powell told the committee yesterday.

Powell also told lawmakers that the Fed was on the job regarding the potential for exuberance in the markets and/or an inflation overshoot. "This is a time when we need to be alert to buildup of either financial imbalances or to inflation building up," the Fed chairman said. "We don't really see those right now."

To be sure, there were enough key words in both the prepared testimony (which the computers can scan in less than the time it takes to blink) and the Q&A with committee members yesterday for the algos to get riled up. And you can also rest assured that traders had their algos lined up and ready to run at high speed on Tuesday.

And because of the fact that Wall Street tends to overdo just about everything - especially when it comes to high speed algorithmic trading (which, again, tends to have little memory from one day to the next), I'm going to opine that at least some of yesterday's dance to the downside may have been an overreaction. As such, I think the action in the bond pits and in the major stock market averages could tell us a lot today, tomorrow and Friday. Stay tuned.

Publishing Note: I am traveling the rest of the week and will publish reports as my schedule permits.

Thought For The Day:

Because of the great differences in our ways of thinking, it is inevitable that we have different religions and faiths. Each has its own beauty. And it is much better that we live together on the basis of mutual respect and mutual admiration. -Dali Lama

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

David D. Moenning
Founder, Chief Investment Officer
Heritage Capital Research

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At the time of publication, Mr. Moenning held long positions in the following securities mentioned: None - Note that positions may change at any time.

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