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Powell testimony, interest rates on tap as markets strain to regain equilibrium

Written By | Feb 26, 2018
Jerome Powell

New Fed Chair Jerome Powell. (U.S. Government photo, public domain)

WASHINGTON, February 26, 2018: As if we don’t have enough on our plates, this final week of February is going to be a busy one for Wall Street. Key events will be few and far between. A primary focus will be Fed Chair Jerome Powell’s first-ever economic testimony before a GOP Congress that’s worried about interest rates. They’ll be eager to hear Powell opine on this issue, which has got both Republicans and American businesses on edge.

On top of those interest rate jitter’s let’s not forget: it’s still earnings season, though we’re in the late innings there. Yet as many companies will be reporting, investors will be examining earnings figures, or the lack thereof, with the proverbial fine toothed comb, looking to weed out underperforming companies from their portfolios. Any corporate laggards will be viciously weeded out in the current investing environment. Of that you can be sure.

Giving U.S. markets a more positive tone today is the welcome fact that interest rates on 10-year Federal paper have been slowly easing. Last week, the 10-year rate nearly achieved the dreaded 3 percent level, which very well might have sent stocks cascading down once again. Ever-higher interest rates, particularly in relatively short term paper tend to attract investing dollars to bonds and away from stocks, which could potentially put a dagger in the heart of our seemingly perpetual Trump bull market. Again, Fed Chair Powell could do much to assuage those fears, depending on his remarks this week.

Assuming the Fed will say soothing about the rate of U.S. inflation (or lack thereof), 10-year treasuries, yield-wise, have dropped below the scary 2.9+ percent level, and investors are breathing easier. For now.

Read also: Raging bull returns? Wall Street rediscovers irrational exuberance in Monday action

It’s still highly likely, however, that the Powell Fed will stick to its target of three more interest rate increases in 2018. The first hike will probably be announced after the Fed’s March meeting. But if the nation’s central bank doesn’t get any more aggressive than that, markets could return to an even, and modestly bullish keel.

Meanwhile, professional investors and large corporations are beginning to scoop up what’s left of the bargains strewn on the trading floor by this month’s earlier market debacle, as CNBC reports:

“February’s stock market correction probably would have been worse if companies had not stepped in to the fray.

“With both traders and retail investors selling at a frenzied level earlier this month, corporations swept in looking for bargains. Sparked by rich valuations and fears that inflation finally might be coming home to roost, major averages each dipped more than 10 percent before recovering about half their losses in recent days.

“As the month nears a close, companies have bought back $113.4 billion of their own shares, good for the highest total since April 2015, according to market data firm TrimTabs. That’s part of an overall strong trend for buybacks, which stand at $5.8 billion a day during the current earnings season, a record.”

That’s great news for a battered market. Yet it’s best for smaller investors to remain somewhat cautious moving ahead. All of us should resolve to remember the clobbering we took earlier this month. It can happen again when investors party too hearty and borrow too much cash on margin to keep stock market festivities going and going.

If investors have a perfectly good position that got hit hard a couple of weeks ago, but is showing signs of strength now, it might be a good idea to double that position and thus lower the average acquisition price. We’ve done a bit of this in our own porftolios.

But otherwise, caution is still the word. Many stocks are still overpriced, and could get whacked again at the least provocation.

After all, as the ancient Greeks once declared (more or less): “Nothing to excess.” If there’s excess anywhere on Wall Street, the gods will move to correct those excesses soon enough. It’s the one thing you can count on during turbulent times.


Terry Ponick

Biographical Note: Dateline Award-winning music and theater critic for The Connection Newspapers and the Reston-Fairfax Times, Terry was the music critic for the Washington Times print edition (1994-2010) and online Communities (2010-2014). Since 2014, he has been the Senior Business and Entertainment Editor for Communities Digital News (CDN). A former stockbroker and a writer and editor with many interests, he served as editor under contract from the White House Office of Science and Technology Policy (OSTP) and continues to write on science and business topics. He is a graduate of Georgetown University (BA, MA) and the University of South Carolina where he was awarded a Ph.D. in English and American Literature and co-founded one of the earliest Writing Labs in the country. Twitter: @terryp17