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All Eyes on Powell: Stocks Fall Amid Fed’s Mixed Message

After a volatile trading day such as this one, I often turn to Eastern philosophy for steady advice. I think of it as “Zen and the art of portfolio maintenance.”

Nervous investors today got whipsawed by every nugget of information from the Federal Reserve. It brought to my mind this quote from the ancient Chinese philosopher Sun Tzu: “Tactics without strategy is the noise before defeat.”

On Wall Street today, lots of noise ended in defeat.

The Federal Reserve did the expected on Wednesday by announcing a modest boost in interest rates. Fed Chief Jerome Powell also issued reassuring words about future rate hikes, saying that the Fed’s outlook for a total of three rate hikes this year remains unchanged. He recommitted the Fed to a gradual rate hike path. So far, so good.

But then Powell went on to suggest that economic growth and inflation could be more robust in 2018 than expected. His mixed message spooked investors.

Stocks sharply rose on the initial news about Fed moderation, but pared gains in the final hour of trading as Powell’s full statement sunk in. A sudden drop in Apple (NSDQ: AAPL) also shook investor confidence. Analyst forecasts for iPhone sales continue to drift lower. By the closing bell, AAPL shares had shed 2.27%.

After bouncing around Wednesday, the Dow Jones Industrial Average, S&P 500 and tech-heavy Nasdaq all ended the session lower.

Here’s my takeaway: The financial press lavishes too much attention on the bureaucrats who sit behind desks in the Marriner S. Eccles Federal Reserve Board Building. Sure, you need to follow the central bank. But rather than obsess about Fed policy, focus instead on the underlying fundamentals of your investment choices.

And yet, cable television today gave the central bank breathless coverage. Emmy-winning journalist Jane Bryant Quinn coined a term for this sort of news — she calls it “financial porn.” Perhaps it’s telling that the second biggest story today was real-life porn star Stormy Daniels. It’s all about ratings.

This afternoon, the Federal Open Market Committee issued its policy statement. The Fed’s policy-making arm announced that it would raise interest rates by another 25 basis points, as expected. Stocks at first soared but then faded. The 10-year Treasury yield spiked to close above 2.90%.

Investors have been skittish that the Fed might get too aggressive, in response to the $1.5 trillion tax cut bill and federal deficit spending. This combined stimulus could overheat an already robust U.S. economy. Indeed, Powell hinted today that fiscal stimulus could push inflation beyond the Fed’s 2% goal. Inflation has accelerated after remaining below the Fed’s target for more than five years.

Powell took over from former Fed Chief Janet Yellen in early February. He triggered a stock market selloff when he told U.S. lawmakers late last month that economic growth might exceed expectations. History repeated itself today, although this time around the declines weren’t as drastic.

Plugged into The Matrix…

In other headlines, personal data theft continues to cast a pall over the technology sector.

Control social media and you control public opinion, as surely as the computer jack in the back of Keanu Reeves’s head in The Matrix controlled his perception of reality.

Hence the uproar over Facebook (NSDQ: FB) and data mining firm Cambridge Analytica. Facebook shares today recovered after a sharp two-day decline, closing with a gain of 0.74%. But the Cambridge Analytica scandal isn’t going away.

Lawmakers in the U.S. and U.K. want to know how London-based Cambridge Analytica hijacked the personal profiles of 50 million Facebook users, for use in disinformation campaigns on behalf of Trump and other conservative causes.

Tech stocks have lost momentum and gyrated this week, as fears arise that Cambridge Analytica’s misuse of Facebook user data could spark greater regulation of Silicon Valley. Facebook CEO Mark Zuckerberg today admitted that his firm made mistakes.

Then there’s the brewing trade war. German Chancellor Angela Merkel on Wednesday decried President Trump’s plan to implement tariffs on steel and aluminum imports. The German leader warned the White House that the European Union was prepared to take strong countermeasures if necessary.

The E.U has indicated that retaliatory tariffs would target products from “red states” that went for Trump in the 2016 presidential election. These products include Harley-Davidson (NYSE: HOG) motor cycles from Wisconsin, orange juice from Florida, whiskey from Kentucky, and tobacco from North Carolina.

Another headline risk: the intensifying investigation of Special Counsel Robert Mueller into possible collusion between the 2016 Trump campaign and Russia. A showdown is looming between Trump and Mueller.

After a stellar 2017, in which the bull seemed impervious to bad news, Wall Street has rediscovered headline risk. As today’s volatility showed, investors are one “breaking news” bulletin away from another steep drop. Don’t buy stocks that you’d be tempted to sell in a headline-induced panic.

Wednesday Market Wrap

  • DJIA: -0.18% or -44.96 points to close at 24,682.31
  • S&P 500: -0.18% or -5.01 points to close at 2,711.93
  • Nasdaq: -0.26% or -19.02 points to close at 7,345.29

Wednesday’s Big Gainers

  • Sanchez Energy (NYSE: SN) +14.43%

Analysts upgrade oil and gas firm.

  • California Resources (NYSE: CRC) +12.99%

Rising oil prices lift energy producer.

  • Steelcase (NYSE: SCS) +5.67%

Furniture maker posts strong earnings.

Wednesday’s Big Decliners

  • General Mills (NYSE: GIS) -8.85%

Food producer cuts profit outlook as costs rise.

  • Winnebago Industries (NYSE: WGO) -5.11%

Analysts pessimistic over RV maker’s future growth.

  • Southwest Airlines (NYSE: LUV) -4.79%

Airline reduces outlook for revenue per available seat mile.

Letters to the Editor

“Does the new tax bill eliminate all deductions for the middle class?” — Peter L.

The tax bill eliminates many itemized deductions that middle-class Americans have taken for granted. But the following deductions stay unchanged:

Medical expenses: The new law preserves the deduction for medical expenses and temporarily reduces the limitation from 10% to 7.5% of adjusted gross income for tax years 2017 and 2018. Beginning in 2019, only medical expenses that exceed 10% of adjusted gross income are deductible.

Charitable donations: The new law preserves all the major charitable donation deductions.

The deadline to file your income taxes this year is Tuesday, April 17. Looking for ways to protect your money from the clutches of the IRS? Send me an email: mailbag@investingdaily.com

John Persinos is managing editor of Personal Finance and chief investment strategist of Breakthrough Tech Profits.

 


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