Another Good Day. All three major indexes held on to gains made early on Tuesday through the close. Even the Nasdaq Composite –badly rocked by the “tech tornado” in recent weeks–managed to end with its toes in the black. In today’s After the Bell, we…
…learn what Fed Vice Chair Richard Clarida said in today’s speech;
…see why a wobbly market might not be enough to change the Fed’s decision;
…and watch a certain utility zoom higher.
The Good, the Bad, and the Neutral
It’s been a second day of market gains after weeks of turmoil. It seems that the oversold condition is enticing some investors to buy the dip.
There was a sign of some fear: The 10-year Treasury yield has fallen to 3.06% from 3.23% earlier this month as investors take up refuge in Treasuries.
Fed Vice Chairman Richard Clarida gave a speech this morning, reiterating the central bank’s previous stance that future Federal Open Market Committee policy will depend on upcoming U.S. economic data and two questions around them. What is the “maximum” unemployment rate that boosts workers income without causing margin pressure? What is the “neutral” real interest rate that curbs inflation without causing a recession?
Clarida said FOMC members have revised their estimates of the ideal levels “substantially lower” over the past seven years, as unemployment and the real interest rate continue to fall, but inflation remains in check.
The uncertainty surrounding these data points and FOMC members’ oscillating views can make the direction of monetary policy “quite sticky,” writes Michael Shaoul of MarketField Asset Management in a note published Tuesday.
“In the current situation, where employment and inflation remain well behaved and most FOMC members believe policy to still be accommodative, it is currently easier for the FOMC to agree to keep raising rates every quarter than to pause or reverse,” writes Shaoul. But he is not sure whether this sentiment will remain true throughout 2019 and thinks future policy is still open-ended.
Although not mentioned in Clarida’s speech, some think the recent tumble in the stock market give the Fed another reason to revisit its policy path.
Shaoul pointed out the Alan Greenspan-era Fed kept hiking rates through May 2000 driven by the combination of a surging economy and bubbly stock market. The first rate cut did not come until January 2001 when the market meltdown already started and the S&P 500 was down 10% from the peak.
Invesco strategist Kristina Hooper also doesn’t think the central bank will come to the rescue this time. Headline inflation might be easing a bit due to the recent drop in oil prices, but core inflation–which excludes volatile elements such as food and energy prices–might still pick up. If that’s the case, the Fed may not have the flexibility to hit the pause button on tightening, writes Hooper in a Monday note.
“We can’t assume that central banks will continue to play the role they have played in the last decade as a powerful safety net,” writes Hooper, “In fact, central banks are more likely to be a risk factor going forward.”
And without central banks serving as a cushion, company fundamentals will matter even more in the upcoming year.
The Hot Stock
PG&E (PCG) shot to the top of the S&P 500, as California starts to sift through the aftermath of the deadly wildfires.
PG&E gained $1.85, or 7.4%, to $26.97.
PG&E has been all over the place recently, repeatedly sinking to the bottom of the index on worries about the fallout from the fires, although it’s also seen relief rallies as well. As of Sunday morning, the Camp Fire, in PG&E’s territory, was classified as contained. The outbreak claimed 85 civilian lives, making the deadliest fire in decades.
California lawmakers and courts are starting the process of investigating the fires and identifying organizations that may face liabilities. “Aside from watching the cost estimates, which will likely drive near-term stock movements, we are keen on response from the California legislature, as several members have acknowledged the wildfire issue and made constructive comments on a legislative fix in the 2019 session,” writes Guggenheim’s Shahriar Pourreza.
Year to date, PG&E is down 39.8%.
The Biggest Loser
Aptiv (APTV) fell to the bottom of the index, following growing pessimism about the trade war.
The supplier of auto electronics and safety equipment lost $3.35, or 4.5%, to $71.09.
Aptiv was hardly the only automotive stock trading lower on Tuesday, and the market in general was trading down after commentary from the White House about plans to go ahead with another round of tariffs. The auto sector is seen as especially vulnerable to the trade war, given the importance of the Chinese market.
Year to date, Aptiv is down 16.2%.
Write to Evie Liu at [email protected]