Wall Street Challenging Trump To Dump Powell
Kenneth Rapoza
Senior Contributor
MarketsI write about business and investing in emerging markets.
To add insult to injury, the MSCI China Index is now outperforming the S&P 500 over the last two years, up 19.87%.
Unless the Fed softens its stance on inflation and the labor market, investors will call for Powell's head.
The market has had it up to here with Jerome Powell. Wall Street spent much of December daring the Federal Reserve chairman to even mention the possibility of raising interest rates in 2019. Everyone expected a 25 basis points rate hike on Wednesday. But the challenge was to get Powell to back off the notion of two more 25 basis point rate hikes next year. He did not. So now Wall Street is essentially challenging President Trump to issue Powell his walking papers.
As mentioned here way back in March and twice in the last two weeks the Fed is the wet blanket for the U.S. stock market.
"The market is basically daring the Fed to hike and not back the dollar. Everyone wants a more dovish tone," says Brian Nick, the chief investment strategist for Nuveen in New York. "The December rate hike was never in doubt. Powell can't be seen as responding to political pressures no matter how much Trump complains. But we see inflation next year at maybe 1% and they're targeting 2%."
And Powell said two hikes likely next year so the Fed either doesn't like GDP growth over 2%, or thinks wage increases will lead to higher inflation. Welcome to the #Resistance, Mr. Chairman. Powell has now joined James Comey and Robert Mueller as the most beloved anti-Trump figures in Washington.
"This guy is working at cross-purposes to Trump. He should be fired. If he goes, the market will breathe a huge sigh of relief, trust me," says Ziad Abdelnour, president, and CEO of Blackhawk Partners, a New York-based investment firm. Abdelnour says he's shorted the market since the midterm elections ushered in a "blue wave" of new Democratic Party politicians. "Powell's now talking about two more hikes and seems sure about it. If they hike again in March, the market will be way worse than it is now."
The S&P 500 is down 15.8% since the last rate hike in late September. By comparison, riskier emerging markets as represented by the MSCI Emerging Markets Index are down 9.9%. The Nasdaq is down 18.7% in the last three months. To add insult to injury, the MSCI China Index is now outperforming the S&P 500 over the last two years, up 19.87%.
The crash that's taken place since October has Powell's hands all over it. It's not algo-traders and retail investors selling mutual funds to buy big ticket items for the holidays. The Fed has gotten a pass on this selloff. Until now. On Thursday, the majority view was that the central bank is a major headwind.
Earlier this week, CNBC host Jim Cramer hinted that Trump was on course to becoming a one-term president thanks to his Fed Chairman. He went on a Tweet storm yesterday.
It's pretty simple: you are supposed to raise rates if you think the GDP is accelerating and pause if you think it is decelerating. You do not use models. I can't believe our fed could be so wrong...
I think there is some grave misunderstanding here of what i am saying which is that the working person was finally starting to make more money and the fed seems displeased with that
Unless the Fed softens its stance on inflation and the labor market, investors will call for Powell's head. Powell seems to want unemployment to rise to around 4.7% -- barely above a historic low. But that means roughly 1.5 million people will lose their jobs, pulling the rug out from under one of Trump's biggest campaign promises. Who wants to bet most of those people who get laid off won't come from six figured salary gigs?
What can it be beside the job market peaking in the fall, a slowing housing market, and the Philadelphia Fed's manufacturing index hitting a two year low (and an ongoing trade war with China) that will give the Fed a reason to pause next year? Investors are not sure what the data point is, and that adds to the volatility.
"A Jay Powell firing is a real possibility," says Brian McCarthy, a former hedge fund trader and now founder of investing research firm Macrolens. If this view moves closer to the center, it will create more volatility and put a top on the dollar. For McCarthy, that sets up the "mother of all buying opportunities" in U.S. equities and emerging markets.
Powell inherited a framework at the Fed that models inflation driven by the "output gap" based on static and uncertain estimates of "potential growth." Given their assessment of the too-hot job market, the model tells them it must now cap real GDP growth at 2% or risk wage inflation.
Trump was elected to get the economy humming again. He's done that thanks to unorthodox fiscal measures at a time of steady, but historically low, GDP growth. He also issued executive orders to reduce regulations. The stock market continued to break records. Trump took credit for all of it. And because most people who don't follow the market have little insights into how the market works, or how it has performed over a period of time, political pundits were hard-pressed to make the case that Trump had nothing to do with it. Some tried to say it was all thanks to former President Obama.
The Fed has taken a pin to the Trump Bump in equities. They're now forecasting growth rates of under 2%, which puts Trump's economy on par with the Obama-era economy -- an economy that survived on Fed life support.
"Trump's economic agenda has no hope of success without a Fed chair" who shares his beliefs, says McCarthy, calling Powell a "bad fit."
There is a chance this moment passes if more hawkish members of the Fed's Open Markets Committee clarify their views on the data it is now focused on. It cannot just be the labor market. Killing the labor market is a really hard sell.
How embarrassing: the MSCI China is outperforming the S&P 500 over the last two years of Trump's presidency.YAHOO! FINANCE VIA BUKKET.
BNP Paribas isn't betting against the Fed. They expect two more hikes next year based on their forecasts of "above potential" GDP growth in the U.S. That's not all that exciting given that potential is around 1.9%. If Trump's GDP growth rate looks like Obama's, then his economy will finally get more attention in the political press. It'll be just another promise unfulfilled, like the border wall. And it will be rubbed in Trump's face.
The only politics the markets care about is monetary policy. So long as Powell is in charge, markets will play defense. Boring utility stocks are likely to outperform.
Even if there is a bounce on Friday, the technicals look downright bearish. The S&P 500 has fallen below its February low point of 2,530 to settle yesterday at 2,467. The index looks oversold and that could bring buyers back today, but the long-term trend is down based on momentum indicators.
"The bears are in control of this market," says Dan Russo, chief market strategist for Chaikin Analytics. "The trends for most of the major markets in the U.S. and globally are bearish," he says, advocating for a defensive positioning heading into the new year.
James Bianco, a frequent guest on CNBC, suggested yesterday morning that Powell was leading the economy down a dangerous path.
"They have to be very, very careful that they don't wind up of breaking something like they've done in the past," he said.
"Hey, Jay. Step into my office for a second, please...."
I've spent 20 years as a reporter for the best in the business, including as a Brazil-based staffer for WSJ. Since 2011, I focus on business and investing in the big emerging markets exclusively for Forbes.
My work has appeared in The Boston Globe, The Nation, Salon and U...
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