Meet the New Boss -- Same as the Old Boss

by Timothy D. Carkin, CAIA, CMT
Senior Vice President

Week in Review

A normal week sees one or two impactful pieces of news that influence the markets. By all accounts this was no ordinary week on that front, yet the markets have largely shrugged it off.  The S&P 500 up 0.15 percent. The Dow Jones Industrial Average (DJIA) set a new high with Apple’s following its blue-chip brethren with a good earning release. That led to Apple’s market capitalization briefly eclipsing the $900 billion mark for the first time. The bond market rallied slightly in response to the Fed minutes and the nomination of a new Fed chairman, the benchmark 10-year down six basis points to 2.34 percent.

No Shortage of News

Economics writers’ keyboards got a workout this week. Thursday had two major announcements that overshadowed what normally would have been enough news for the week. Normally Fed minutes, nonfarm productivity, nonfarm payrolls and a rate rise from the Bank of England would suffice. This week also saw a GOP tax plan and new Fed chair announcement. No doubt the latter two will lead the news cycle as they work their way through Congress in the coming weeks.

With the GOP-led House Ways and Means Committee releasing its tax reform proposal Thursday, many were hailing it as better-than-feared. The plan would cut an estimated $1.5 trillion in tax revenue over the next 10 years. Some highlights of the bill are a 20 percent corporate tax rate, immediate capital expenditure deductibility and an increase in the standard deduction. The tax plan’s release is only one step in the passage of the tax reform that the president promised this year. Already, many lobbying and advocacy groups have announced their strong support or opposition, which has many analysts lowering the odds of the final bill being ready for a vote in 2017.

If a major overhaul in our tax code wasn’t enough news for Thursday, President Trump nominated Federal Reserve Governor Jerome Powell to replace Janet Yellen as the next Federal Reserve chair. Powell is largely seen as the “status-quo” option who will continue down the path that Janet Yellen blazed. He will take over a U.S. economy with accelerating growth, tame inflation and unemployment at its lowest rate in 16 years. Powell has stated that he would continue gradually raising interest rates from historic lows. There were concerns that the current regime was too academic and model-dependent, so it was anticipated that the president would nominate an outsider. Powell appears to thread the needle between the two as he was a partner at The Carlyle Group and Undersecretary of the Treasury for George H.W. Bush prior to his current tenure on the Board of Governors.  

Wednesday, the Federal Reserve held interest rates unchanged leaving the door open for a December rate hike. After the announcement of Powell’s nomination, the odds of a December hike rose to 92 percent―the highest it’s been during Yellen’s tenure. The Fed noted a solid pace to economic growth and a growing confidence among business. Not to be overshadowed in the rate raising game, the Bank of England voted for their first rate hike in more than 10 years, raising the Official Bank Rate from 0.25 percent to 0.50 percent. It’s not just the U.S.―Europe is showing signs of growth.

Lastly, the October jobs report returned to its pre-hurricane-season form with nonfarm payrolls increasing 261,000 and upward revisions for September and August numbers. This was lighter than the 315,000 economists estimated, but it brought the jobless rate to a low of 4.1 percent, which has not been seen since 2000.

This week was an exception in the quantity of news and it will probably reverberate in the weeks to come. What is worth noting is that most of it still points to economic growth, not excess or exuberance.

Takeaways for the Week

  • Fed Governor Jerome Powell is a safe choice for continuing Yellen’s policies
  • The U.S. and global economies are on a solid trajectory