The Zigmont Report (Daily Market Recap for 6/14/17)

FintekNews is pleased to launch our new feature “The Zigmont Report (Daily Market Recap)” today.  We will publish this right after the market close, and each feature will appear the following morning on our M/W/F newsletter as well. 

Mike Zigmont, author of the Zigmont Report, is a partner at New York-based Harvest Volatility Management, a hedge fund with over $10B AUM, offering volatility management solutions to its investor base worldwide.  Mike has been publishing his daily newsletter (Monday-Friday) privately for the firm’s investors and his personal contacts in the investment business since 2008, sending shortly after the market close.

The opinions expressed below are my own and do not necessarily represent those of Harvest Volatility Management, LLC.

Hiked.  As expected, the Fed hiked the Federal Funds target rate 25 basis points to the 1-1.25% range.  This was a telegraphed move and the headline surprised no one.  The Fed also stuck to its planed hiking path and it looks like another hike is in the cards before the end of the year.

When it comes to new info, the Fed revealed details on how they want to shrink their balance sheet as well as the approximate timing of that process.

If all goes according to plan (big if), they want to start shrinking the balance sheet this year (very gently at first).  Maybe that kicks off at the Sep 20 meeting or the Nov 1 meeting.  The market is currently thinking that the 3rd rate-hike will happen at the Dec 13 meeting…. So given the fact that the Fed wants to be gentle, it probably makes sense for the balance sheet reduction to begin in isolation instead of concurrent with another rate hike.

Of course a hike could happen in Sep and the balance sheet reduction could begin in Nov or Dec, but the market isn’t seeing that right now.  It’s not that big of a difference anyway and as time goes by the Fed will surely guide market expectations properly.  Repeat after me: “The Fed does not want to surprise the market.”

Anywho, let’s focus on a few things that I think are more important than some of the language changes in the statement.

FED estimates for 2017, 2018, 2019, long-run:

  1. GDP
  2. 2.2%, 2.1%, 1.9%, 1.8%
  3. unemployment rate
  4. 4.3%, 4.2%, 4.2%, 4.6%
  5. Inflation
  6. 1.6%, 2.0%, 2.0%, 2.0%
  7. Federal Funds rate
  8. 1.4%, 2.1%, 2.9%, 3.0%

I don’t want this to be a numbers-soup so let’s just do this at a high level.

  • 2-ish percent growth for a while
  • even less unemployment over the next three years
  • 2-ish percent inflation
  • 3% interest rate is the goal and it’s about two and half years away
    • Implies about 3 hikes each coming year

Let’s interpret.

That’s not much economic growth.  We should expect good nonfarm payrolls data for a while.  Hiking will continue at the current pace.

Blah growth (or better) isn’t going to get the Fed off its plan.  If their hiking with GDP at 2%, they aren’t going to stop if GDP ramps to 3 or 4 percent.

Tighter labor markets are the expectation… and if 4.6% is their long-run estimate for unemployment, some labor softness along the way won’t derail their plan.

To me, it looks like the only thing that can derail their plan is an inflation surprise (big deflation, maybe from a recession).  Baring a recession, we’re heading towards 3% short term rates by 2019.


So the stock market didn’t react much to the Fed events.  This isn’t too surprising since the Fed didn’t surprise.  I think a lot of bulls are going to stay bullish because today looks a lot like yesterday and the bulls own the trend.

But…. I come back to my valuation concerns.  In a 2% growth world with 2% inflation and rates climbing to 3%, why does it make sense to buy US equities at current valuations?

Valuation is not a catalyst but I think it’s the foundation for a risk/reward trade-off.  And I don’t like the current situation for equities one bit.

We’ll do a valuation dive tomorrow but for the moment the Fed is telling me that growth is looking meh and rates will climb.  AND the only way they don’t hike is if we get a recession.  Either of those outcomes are not a good prognosis for equity valuations, if you ask me (big if).

See you tomorrow,