WASHINGTON, March 29, 2016 – Tuesday trading action got off to a bad start this morning due to negative vibes from the usual suspects: oil, which continued to decline sharply from last week’s $40 plus per barrel peak; and rising interest rate fears, kicked off by hawkish comments from St. Louis Fed Prez James Bullard.
But what a difference a few hours make… In a story released around 2 p.m. Tuesday EDT, CNBC reports that Fed Chair Janet Yellen has injected a bit more clarity and sunshine into the gloomy investing atmosphere that was gathering on Wall Street:
“Yellen, speaking to the Economic Club of New York, noted in prepared remarks that recent readings on the strength of the U.S. economy since the beginning of the year have been mixed. All major U.S. indexes turned positive and Treasury yields hit multi-week lows after the release of Yellen’s remarks.
“On the policy front, Yellen said research suggests that, with a funds rate at zero and increased uncertainty, the best policy is greater gradualism. Still, the Fed can hike if the economy grows faster, she said. But if the economy falters, she added, the Fed can ‘provide only a modest degree of additional stimulus.’”
Hooray! Traders were off to the races. Although, as always, we won’t even bother to predict Tuesday’s closing averages, since the algos and high-frequency traders generally do a surprise run-up or take-down of our thinly traded markets right before each day’s 4 p.m. close. We’re not permabulls here. But it’s generally easier to make money in an up-market, so we’ll take what we can get.
While oil and commodities have recovered somewhat from their “Walking Dead” act in January-February of this year, it’s not altogether certain where things are going in the short and intermediate term. A lot of the market’s direction seems to be hinging on the price of oil, which, according to many pundits and industry analysts, will need to stay above $40 bbl., at least, in order to prevent mass bankruptcies in the U.S. oil patch.
Lately, as goes the price of oil—in this case, West Texas Intermediate (WTI)—so, too, go the prices of various commodities, all of which have been in deflationary mode for two years or more. As long as oil struggles to get past that $40 upside cap for more than a day or two at a time, there will be, in fact, no real inflation. Which means that there’s virtually no justification for the Fed to jack up interest rates significantly. And that, in turn, is what Yellen has been trying to articulate.
We have our problems with Ms. Yellen. But over the last several months, it’s clear that she does know her Fed history, and has no intention of committing the mistake the Fed made back in 1937 when it jacked up interest rates prematurely, derailing an already delicate economic recovery that had begun only a bit earlier.
Only the mass-tragedy of World War II bailed the nation’s central bank out of that screw-up. It would be the height of stupidity, even for the dumbest of Keynesian nincompoops, to ignore that lesson now. It appears that Yellen is not one of those.
Other news is a bit thin today, typical during the lull between each quarter’s “earnings season” reports. We’re still cautious re-entering markets at this point, although we continue to nibble at select preferred stock issues. We’re probably a bit heavy on these right now, and could pay a price for this if and when the Fed does decide to hike interest rates a bit. But we’ve increased the quality of our holdings in this area, which should limit their volatility.
We’re really eager to get our large cash position back to work in actual stocks and ETFs again. But the tea leaves need to look a bit more attractive—on larger volume—before we start heavying up on stock positions again.
Stay tuned. If today stays strongly positive, it may be time to start moving. The month of April tends to be “seasonally positive” for traders, so we’d like to cop a few good trades before we “sell in May and go away.” Which we’re likely to do this year, given the sheer mass of weirdness that’s associated with this year’s election cycle. Headline risk will increase as we approach November, and we’ll need to exercise some caution in the months ahead.