Jerome Powell’s job is done here. Now it’s up to Trump.
If stocks plunge next week or otherwise fail to sustain this week’s bounce, Donald Trump can’t blame his beleaguered Fed chief.
After enduring months of withering criticism from the President and having demonstrated a stoic fortitude befitting of Marcus Aurelius amid accusations that his characterization of policy as “a long way from neutral” catalyzed the October rout in global equities, Powell delivered what was asked of him this week.
He changed his assessment of where policy is vis-à-vis the neutral rate (or at least that’s what he’s saying publicly which is all that matters) and the November minutes, released a day later, underscored the Fed’s apparent shift, suggesting this was weeks in the making.
The result: the best week for U.S. stocks since 2011.
Powell also managed to slam the brakes on the Growth-to-Value shift that predominated during the selloff and lingered during the November volatility. This was among the three best weeks for the Growth ETF relative to the Value ETF in years.
In the same vein, this was the best week for the Bloomberg U.S. Pure Growth Portfolio total return index since 2011.
In addition, rates markets have aggressively repriced the Fed path and markets pretty clearly believe that 2019 will see just one additional hike after December. Again, that’s about all you can ask Powell to do.
So, it’s up to Trump to keep the momentum going. The news flow around a possible trade truce with China was generally upbeat on Friday, but there are myriad reasons to doubt that a meaningful deal is possible. That said, anything will do here. A simple commitment to keep talking paired with a tacit understanding that the U.S. won’t escalate things further for the time being would be all the excuse risk assets need to extend the rally, especially in light of Powell’s apparent relent.
As noted early Friday, discretionary/fundamental investors are likely underexposed following the October de-leveraging/purge, leaving them to scramble for exposure on large moves to the upside, a dynamic that could potentially turbocharge rallies.
In a note out Friday evening, Goldman underscores light positioning among institutional and leveraged investors. “Our Sentiment Indicator, which measures net equity futures positions of institutional and leveraged investors relative to the past 12 months, stands at just 12”, the bank writes, adding that “the most recent move lower in net equity futures exposure has been primarily driven by a decline in long positions.”
Goldman goes on to reiterate what they laid out in the latest edition of their quarterly hedge fund monitor. “After declining all year, hedge fund net exposures stand near the lowest level since 1H 2017 [and while] gross exposure had held up for much of 2018, [it] declined sharply during the most recent equity market sell-off”, the bank says.
There would appear to be considerable scope for re-leveraging from this crowd (assuming they have the P/L to play with after an abysmal October) and when you throw in the possibility of CTAs piling on, you’re left to ponder the prospect of a sharp move to the upside on any positive news out of Buenos Aires. If Growth can continue to outperform, well then all the better.
Goldman also reminds you that “December has historically been a strong month for US equities [with the] S&P posting a positive December return in 79% of years since 1985 (median return of 1.3%), the highest hit rate of any month.” That’ll need to materialize if the S&P is going to make it to Goldman’s year-end target.
Of course this could just as easily go the other direction. It’s all up to Trump now. If he drops the ball, perhaps Jay can get himself a verified Twitter account and lament #DeplorableDon killing the Powell put rally.