Market Commentary for August 2019

"Fantastic news and act of lunacy... "

By Alan Hull

This commentary is in part or entirely created using extracts and comments from my weekly Blue Chip Report. For more information about the Blue Chip Report, including subscription details and a recent sample report, go to Blue Chip Report

The U.S. Federal Reserve has just finished a two day meeting, after which Jerome Powell held a press conference and announced a 25 basis points reduction to the Fed's target interest rate to 2 to 2.25%. And as someone who is invested in global equity markets I think this is fantastic news.

It completes a worldwide picture of central banks easing monetary policy, with our local RBA leading the way. Although Jerome did temper this move by saying it should not be seen as the start of an easing cycle, but rather a one-off course adjustment. So investors have had a bit of a dummy spit over this last, which I think is just a short term thing. So happy days ahead....

Now as someone who has two brain cells to rub together and a vague notion of macro economics, this is a further act of lunacy by yet another central bank. How fast we forget...global interest rates were lowered to their current levels as an EMERGENCY measure to stabilise the world economy back in 2008/09. And now, as so many commentators predicted, we are addicted to easy money and can't get off it.

Jerome said this easing move is an insurance policy of sorts to ensure the current recovery in the U.S. economy doesn't wane under the influence of global economic weakness. In other words to prevent the recovery from possibly slowing down they have lowered interest rates. So they have lowered interest rates from an already EMERGENCY low level to prevent something that hasn't happened yet, from happening.

The only bit of current economic data they can claim in support of this move is that inflation is running at 1.6%, whilst their target is 2%. Pretty skinny stuff in light of the asset bubbles that have been growing around the world for the past decade. And if you want to know what a bubble looks like then here's the NASDAQ Composite index rising exponentially since the low of March 2009. It has risen from 1,400 to nearly 8,000 points being an increase of 470%.

I suspect Jerome & company would say that you can't spot a bubble until it bursts, the same words Alan Greenspan used during his tenure as Fed chair. However last year Alan said the U.S. was in a Stockmarket and a Bond market bubble, so it looks like he's stopped drinking the Kool aid. Call me a cynic...but I think the FOMC started with a conclusion and worked their way backwards. And on that basis they have done very well...calling it an insurance policy rate cut is a first in my time of Fed watching.

Now I'll get down off my soap box and back to my knitting...clarifying what this means for equity markets. I am a cautious bull. I am fully committed to the Australian and U.S. Stockmarkets, but well aware that we are in the late stages of one of the largest global bull runs in history. I'm making hay while the sun shines and I strongly suspect this will continue well into 2020...especially if President Trump has any say in the matter. Thus it is very rare that a U.S. economy or markets have ever faltered in the lead up to an incumbent President running for re-election.