What We Learned from the Fed (but Already Knew)
- Howard Isaacson
- Sep 21, 2015
- 4 min read
Over the last week, we learned that the Federal Reserve was going to leave rates at their current level for at least the next month. Chair Yellen cited numerous factors for not raising rates including:
Increased level in global risks to US and global economic growth.
Reduced trajectory for US inflation, based on “lower energy and non-energy import prices”, based upon the combined impacts of lower commodity prices and the appreciation of the US Dollar.
The continuing weakness in the employment participation rate.
“Restraint” from net exports.
“Contraction in oil drilling activities” as a component of US business fixed investment.
Reduced estimates of the long-term US growth rates.
Tightening in financial conditions due to volatility and increased uncertainty in the US stock markets.
Chair Yellen did also say ”The economy has been performing well. And we expect it to continue to do so.”
Chair Yellen’s transcript is at: http://news.morningstar.com/all/dow-jones/us-markets/201509179531/transcript-of-fed-chairwoman-janet-yellens-news-conference.aspx
Through the question and answer period, additional risks to the economy were cited and it became clear to some listeners that there may not be an increase in 2015 due to the state of the rest of the world and its impact on the US economy and markets.
Her comments had the effect of increasing uncertainty, which when translated to stock prices, resulted in a two day correction in stock prices. The market move was contrary to the expectation that the market would rally knowing that cheap money was to continue for the immediate future.
So, YES, risk has definitely increased. This increased risk, though, is now embedded in market valuations, for stocks as well a bonds. (We saw a tremendous swing downward in yields, especially on the 2 year T Note, immediate after the Fed’s announcement.)
The market today, Monday September 21, is responding well and most stocks are moving higher, with the exception of the pharmaceutical space, which is being impacted by selling based on Twitter comments made by Presidential Candidate Clinton regarding the need to control pharmaceutical costs. She has announced she will release her plan tomorrow.
Here is a “map” of the markets today, as of 2 pm:
Let us look at the markets over the past week followed by the news that moved it:
The DJIA from 9/8 to 9/21:
The yield on the 10 Year Treasury Note from last Tuesday to today:
Source: Marketwatch.com
Crude Oil over the past 3 months:
Source: Marketwatch.com
Other economic news over the past week: (As you will see, much of this supports the Fed decision.)
Retail Sales for August came in at +0.2% and excluding Autos and Gas it was +0.3%. August was 0.1% below consensus estimates. Auto sales are up 6% y/y. http://www.census.gov/retail/marts/www/marts_current.pdf
Industrial production for August came in at -0.4% from 0.9% for July. Manufacturing utilization is running at 75.8% in August. http://www.federalreserve.gov/releases/g17/Current/
Empire State Manufacturing Index:
Consumer Price Index:
Note: Core excludes food and energy.
New Jobless Claims:
New Residential Construction Starts in August ran 16.6% higher than August 2014 but 3% lower than July. Permits issued in August were up 3.5% from July and 12.5% over August 2014. http://www.census.gov/construction/nrc/pdf/newresconst.pdf
Conference Board Leading Economic Indicators: Increased by only 0.1% in August after being flat in July. “The U.S. LEI suggests economic growth will remain moderate into the New Year, with little reason to expect growth to pick up substantially.” https://www.conference-board.org/pdf_free/press/US%20LEI%20-%20Press%20Release%20SEPTEMBER%2018%202015.pdf
FactSet.com Earnings Analyses
FactSet analysts have found that US companies with higher concentrations of US sales should be able to grow revenues and profits in this coming quarter:
“The estimated earnings decline for the S&P 500 for Q3 2015 is -4.4%. For companies that generate more than 50% of sales inside the U.S., the estimated earnings growth rate is 3.1%. For companies that generate less than 50% of sales inside the U.S., the estimated earnings decline is -14.1%. The estimated sales decline for the S&P 500 for Q3 2015 is -2.9%. For companies that generate more than 50% of sales inside the U.S., the estimated sales growth rate is 1.4%. For companies that generate less than 50% of sales inside the U.S., the estimated sales decline is -12.1%.”
Commentary:
For those who have been reading these notes regularly, the Fed’s decision to “stand firm” should have come as no surprise. The reasons Chair Yellen cited are consistent with our observations over the past four weeks and the current reading of the economy.
There are numerous drivers of stock prices over the longer term, including:
projections of future cash flows and profits (net of taxes),
the discount rate used for valuations (which reflects risk, uncertainty, the inflation rate and the risk free rate of return),
current revenue levels, profitability and cash flows, plus
expectations regarding dividends and share buy-backs,
market sentiment, and
economic, industry and company growth expectations.
Though Chair Yellen did raise the issue of US economic growth slowing and the negative influences from abroad, she did indicate that they are watching closely and are not to be swayed by talking heads and really "smart" people who are watching Wall Street and not Main Street.
Though there will continue to be challenges for those companies that have more than 50% of their revenues and profits from overseas, things are looking much brighter for those companies with US focused revenue streams.
As always, our focus is on individual companies and sectors, and rarely on the broad “market as a whole.” There are opportunities out there and the analysts and researchers at CapitalRock are working hard to uncover those and the opportunities they present.
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