November 2019

As we ease into year end, the Fed has managed to avoid upsetting the capital markets as it did last December.  Fed Chairman Powell, at the recent post-FOMC press conference sounded a tone of neutrality with regards to policy and despite repeated questions about the next move in the overnight lending rate, he remained noncommittal.  He also faced questions about the repo market and the performance of the sector since September.  Again, he assured those in the room that the Fed was working to maintain stability and that there shouldn’t be any significant disruptions.  Counter to that, a number of market watchers have seized upon the issue as a potential catalyst for a sharp market correction in both stock and bond markets.  They warned that any downward price moves will be intensified due to the limited liquidity of the holiday period.  We don’t share that view and doubt that the repo issue will become a problem in the coming weeks.  The Fed has committed to backstop as much as $365 billion to the repo market over the turn of the year.  In addition, they’ve been actively involved in term repo which, as the name suggests, is an extended version of their overnight lending, with three of those terms extending into January. 

The bigger question is where do we go from here, especially in the stock market?  As of this writing, the S&P 500 has gained more than 27% this year, far outpacing the rate of earnings growth and exceeding the forecast of virtually every market watcher on the Street.  The first clue will come in January as earnings begin to trickle in.  Judging from anecdotal evidence, the fourth quarter should be a good one for earnings.  Granted, the trade war has hung over business spending for the period, but that didn’t seem to dent consumer confidence or their desire to consume.  Black Friday again generated robust sales and Amazon said that cyber-Monday sales set an all-time record.  In addition, there had been no instances of severe weather that had typically disrupted shopping and prevented people from going to work.  But will that be enough to sustain what, by nearly every measure, could be called an overvalued stock market? That remains to be seen.

Also, clouding the market is the reemergence of Brexit.  Prime Minister Boris Johnson’s gambit to hold an election has paid off and it now seems that the next step will be to follow through with a “hard” Brexit.  That is a severance of the Great Britain-European Union relationship without all of the details agreed upon.  We’ve seen two previous episodes of a potential hard Brexit but neither has coming to pass.  In each instance, doom-sayers predicted long lines of supply trucks held up at the border and shortages of everything from food to prescription medicine. Prime Minister Johnson is in favor of a hard Brexit and letting the pieces fall where they may; and with his decided victory as Prime minister, the January 31, 2020 deadline is unlikely to be extended yet again.  In prior instances, the Bank of England has warned of a dire impact on GDP and the value of the Pound Sterling, but there is no hard evidence to support that.  No one knows what to expect.  It reminds us of the situation 20 years ago when the tech world approached Y2K with much trepidation.  At the time, the world wondered if business would grind to a halt when the calendar changed from 1999 to 2000, since much of the software at the time was not built to handle a change in the millennium.  On that January 1st, virtually everything operated as it was meant to and society went on.  Could the same be the case on February 1, 2020? Perhaps, but not likely.  Hopefully, however, the impact is not nearly as drastic as some have feared.  To look on the bright side, with Brexit uncertainty gone, U.K. economic growth may actually accelerate. 

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