Powell Pause

Chairman Powell is trying to pull off a mid cycle adjustment by cutting 3 times just like Greenspan in 1998.  Although he didn't outright say that the Fed is in wait and see mode, you could tell by the Fed statement and his subtle emphasis on reduced global risks in regards to trade and Brexit in the press conference. 

After 3 rate cuts and the S&P 500 being at all time highs, it seems clear that he doesn't want to waste his remaining rate cutting ammo when the financial markets are doing well.  But let's not pretend like the Fed is the one in control.  The STIRs and bond market are the ones that are making the decisions.  After last December's fiasco, Powell is now terrified of upsetting the markets, so he will be taking orders from the bond market, even if he doesn't admit it.  

The Fed is data dependent, and that data is coming straight from the short term interest rate market.  And the short term interest rate market is mostly dependent on the stock market, because the financial markets is the main driver of the economy now.  In the past, you had regular boom and bust economic cycles as the Fed wasn't overtly distorting financial markets.  That changed with Greenspan, and now we have a bubble based financial economy that needs a rising S&P 500 in order to sustain itself.  

There is a significant number of people in the US who need a rising S&P 500 to maintain a retirement fund while also funding their spending habits.  The worst thing that can happen for economic growth in this rising asset dependent economy is for financial assets, either stocks or bonds, to fall for a sustained period of time.  I am not talking about the 3 month bear market we had from October to December 2018.  I am talking about a bear market where prices go down, and stay down for over a year.  This happened multiple times in the 1970s and in the 2000s.  The overvaluation of the stock market with no earnings growth is setting up another decade of sustained lower prices. 

But unlike the 1970s and 2000s, the economy can't sustain itself with lower asset prices.  It is now a powder keg waiting to explode with how big a portion of financial assets, especially stocks, have become as a percentage of GDP. 

This doesn't include the private equity bubble that makes it attractive for overvalued companies to stay private and not get the scrutiny such as a WeWork has trying to IPO and sell itself for a ridiculous valuation expecting idiots to buy worthless equity for several billions.  

The main reason that the US is holding up so well compared to Europe and Asia is because of the quasi MMT policies of Trump boosting both government spending and cutting taxes.  A trillion dollar budget deficit goes a long way towards boosting GDP growth.  

So from 2017 to 2019, the main reason the US economy isn't already in a recession is because the government went on a spending spree while cutting taxes which mainly helped corporations, thus boosting the stock market.  That is why the 2020 Presidential election is so important.  If you get an Elizabeth Warren in there, you are probably getting tax hikes and a likely recession.  This is one of the few times where the fear mongering over an event is actually the real deal.  Elizabeth Warren would be a nightmare for the stock market.  That is why the biggest negative catalyst is going to start when the Democratic primaries are in full force, in February and March next year.  

I would not be surprised if 2020 starts pricing in the possibility of a Warren presidency, which would mean much lower SPX levels.  How quickly traders and investors get bullish when the market hits all time highs, even when the last few times that happened this year, you had a sharp correction a few weeks later (May and August).  I expect that to repeat, as the earnings growth is just not there anymore to support this market ahead of an event heavy 2020.  

The Fed will likely be back in play for more rate cuts as I am sure business confidence will be weak heading into the uncertainty of the 2020 elections.  

November and December are stock buyback heavy months, so that will be a support for the stock market even at these nosebleed levels.  So I don't expect much downside for the rest of the year, but with all the negative catalysts coming up, I don't expect much upside either.  So probably a low volatility tight range market for the rest of the year.  The trade news is now just a side show as it loses relevance ahead of much bigger and important things in 2020.