Several times I have commented about possible emerging strength in the US economy. Fed Chair Yellen made similar remarks yesterday stating “I see the US economy is performing well…domestic spending has been growing at a solid pace.” Yellen further remarked the improving economy “has set the stage for a December interest rate increase” if reports continue to show current improvement and strength.
One month ago, most including me, abandoned the idea of a change in monetary policy until March 2016.
Equities and commodities sold off nominally on the news while the dollar rallied.
Many times I have opined the markets have been “spoon fed” by the Federal Reserve, believing that this august body is both omnipotent and omniscient. The Fed has changed its MO telling all that monetary policy is dependent upon the data and how this data is interpreted.
Unfortunately interpretation is subject to confirmation bias and preconceived expectations.
Speaking of such, many times I have commented about the outsized influence ETFs and HFTs are having upon the markets further stating if passive investing is the pathway to riches all would be infamously wealthy.
What happens to valuations to the most own large cap growth stocks that has led the markets higher when there is a change in monetary policy? According to JP Morgan large cap growth is up 7% while most other sectors are down 5% to 35%, the largest bifurcation in history. Large cap growth is dominated by ETFs and HFT.
I reiterate I think today may be analogous to 2002-05 when the “most owned large cap growth issues” grossly underperformed and the typical company outperformed. In many regards the environment is similar.
What will happen today? Will activity be subdued ahead of tomorrow’s BLS labor report? Speaking of which the ADP Private Sector Employment survey largely matched expectations and had no major impact upon the markets. The ISM Non-manufacturing index which also exceeded expectations was largely ignored.
Last night the foreign markets were mixed. London was down 0.52%, Paris up 0.96%, and Frankfurt up 0.89%. China was up 1.83%, Japan up 1.0% and Hang Sang down 0.01%
The Dow should open moderately higher on economic optimism. The market is now suggesting a 60% chance the central bank will hike rates in December following comments made by other high ranking fed officials similar to that of the Chairwoman. The 10-year is unchanged at a 2.21% yield.
Possible emerging strength in the US economy?
Ken Engelke
Chief Economic Strategist Managing Director
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