It was the last Federal Open Market Committee (FOMC) gathering under Janet Yellen. While there was no official action, the communique sent the market lower; and then in a flash, all three indices closed in the plus column. 

FOMC Statement Excerpts Information received since the Federal Open Market Committee met in December indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. Gains in employment, household spending and business fixed investment have been solid, and the unemployment rate has stayed low. Market-based measures of inflation compensation have increased in recent months but remain low; survey-based measures of longer-term inflation expectations are little changed, on balance. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong. Inflation on a 12‑month basis is expected to move up this year and to stabilize around the Committee's 2 percent objective over the medium term. In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1-1/4 to 1-1/2 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation. In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

Goodbye, Goldilocks

Conventional wisdom holds that the Fed will hike rates at their next meeting, and if economic data remains strong, perhaps more than three or four times this year. I think the Street is modeling for two or three hikes; more than three could be seen as a threat, but investors shouldn’t fall into that trap. 

If this economy keeps up this pace, four rate hikes would not only be reasonable but prudent. It sure looks and feels like we’ve gone past the Goldilocks phase of this economy.

• Wages increased at the fastest pace since 2008
• Homeownership increased year-over-year for the first time since 2004
• ADP saw 230,000 jobs created last month

The Fed is in play, but it’s been in play for a while now. We should be fine if they don’t overreact.

January Effect

I was very impressed with the way the market rebounded as all the major indices climbed off the canvas to close higher. If January is the barometer for the rest of the year, 2018 is going to be gangbusters.

The S&P 500 posted its best January since 1998, rallying 5.62%, slightly less than the Dow Jones Industrial Average, which was up 5.79% in January.

The big winner for 2017 has been the NASDAQ, led by its high-flying names (the modern-day Horsemen Stocks of Tech). However, we could see their miraculous rally get interrupted as investors react to earnings that had the Herculean task of justifying recent parabolic moves.

After the close on Wednesday, Microsoft (MSFT) posted earnings that beat the Street by $0.10, and Facebook’s (FB) bottom line came in at $0.26 better than expected. Shares in both names promptly swooned before reversing higher. Today, we get results from Apple (AAPL), Alphabet (GOOGL), and Amazon (AMZN).

Today’s Session

Big name tech companies, Microsoft and Facebook, which were initially lower last night after posting financial results, are higher this morning underscoring the power of the conference call when you have a celebrity CEO.  But the rest of the market is looking vulnerable despite mostly strong results, routinely besting the street on the top and bottom lines.

This action isn’t a surprise after such a big run-up, but it presents a challenge.  Ninety-five percent of the losses I’ve experienced in the market have revolved around earnings announcements and reactions.  Of those losses, about 80%, I regretted within a year.  This isn’t to say we shouldn’t take losses, as they are absolutely crucial to long term success.  But beware of the crowd following the crowd.

Also, beware of concerns like the ten-year bond yield being a reason to dump ownership in great performing companies.  Not saying it won’t be an influence on the market.  It will be because the talking heads always say the same thing.  But longer term it, will be a tempest in a teapot. 

I think yields can go much higher in a strong economy without being a death knell for equities.

For now, the market will grapple with a rough start, and the first down week of the year, and possibly the worst week for the S&P since 2016. 

Meanwhile

Tax Cut Windfall Update

Internal Memo from Lowe's:

Paying 260,000 part & full-time workers bonuses & effective in May, expanding benefits package to include:

• 10-week paid maternity
• 2 week paid parental leave
• $5,000 adoption assistance
• Faster eligibility for health benefits

#Winning

Main Street is doing better, and wages are going up, and this will have positive consequences for the stock market that matter more than periodic bouts of profit-taking.  Hang in there, but if you are worried or have questions, contact your rep or the research desk.

Comments

After 8 years of virtually no wage growth and a big destruction of household wealth so why are the FEDS concerned about wage growth now. I would thing the new Tax Law,relatively low interest rates would drive investment and innovative increases in productivity would keep inflation modestly growing! I may be wrong on that assumption but, rapidly rising interest rates could harm the strength of our economic growth. It's time the wage/wealth gap between workers and the executive class and government earners is closed significantly. Garro on 2/1/2018 11:42:06 AM

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