Jerome Powell starts his tenure as chairman of the U.S. Federal Reserve this week amid one of the biggest routs for domestic stocks in at least two years and increasing concern that he'll need to act more aggressively than his predecessor to tame inflation pressures in the world's biggest economy.
It's likely to be a raucous first week for Powell, a former Fed Governor and Wall Street veteran, as 10-year government bond yields rise to the highest level in four years, equity market volatility spikes to the highest since 2016 and investors look to the central bank for more clarity on its plans to raise interest rates amid an improving domestic and global economy.
Powell, who was confirmed by a vote of 84-13 in the Senate last month, never once deviated from the policy path set forward by his predecessor, Janet Yellen, during his six years as a Fed Governor and is widely seen as a "safe pair of hands" on the central bank's rate tiller as he prepares to be sworn-in for his four-year term later on Monday.
Today is Jerome Powell's 1st day as Fed Chairman. In 1987 Greenspan took office just as exploding budget and trade deficits were sending the dollar down and bond yields up. An over-valued stock market crashed 2 months later. I wonder if Powell's honeymoon will last that long?
- Peter Schiff (@PeterSchiff)February 5, 2018Fed policy makers who spoke last week, as well, appeared to remain committed to three rate hikes this year, a view that is largely in-line with market expectations, even as growth and employment booms both at home and abroad and wages rise at the fastest pace in more than eight years.
Dallas Federal Reserve President Robert Kaplan told reporters in Austin, Texas Friday that he felt "more strongly" that the Fed's baseline should three rate hikes over 2018, noting that "you will see some inflation pressure this year. "I believe that the Fed should be removing accommodation gradually but deliberately," he said.
Is the stock market done crashing?
In California, San Francisco Federal Reserve Bank President John Williams said that, while he was "buoyed by the optimism" in the economy, he didn't see it "at risk of shifting into overdrive."
"I have boosted my growth forecasts for this year, but I don't see an economy that's fundamentally shifted gear," he said. "Given that the economy's performing almost exactly as expected, you can expect policymakers to do the same."
That's likely to be comforting news for equity investors wondering how the Fed will react to last week's sell-off -- the worst in at least two years -- and rising 10-year U.S. Treasury bond yields, which hit a fresh 2014 peak of 2.865% in overnight Asia trade.
If the year-to-date move move in bond yields is simply a delayed reaction to improvements in the U.S. economy's growth prospects (10-year Treasuries have gained 46 basis points since Jan. 1) and fuelled by a healthy concern for moderately faster inflation, last week's equity market declines could prove temporary.
While it's true that the market's benchmark measure of near-term equity market moves, the Chicago Board of Trade's Volatility Index, better-known by its ticker symbol, (VIX.X), is trading at the highest levels since Oct. 2016, it's worth noting that the underlying strength of corporate earnings remains impressive.
Bottom line gains for S&P 500 companies are expected to rise by 13.7% when the current fourth quarter earnings season comes to a close, according to Thomson Lipper data, and more 80% of companies reporting so far have beaten Street expectations.
The trailing 12-month P/E ratio for $SPX is 23.8, above the 10-year average of 17.0. https://t.co/rXeeloYLj0 pic.twitter.com/p4E7wSjeVX
- FactSet (@FactSet)February 4, 2018That said, U.S. stocks are also relatively expensive, according to FactSet data, and are trading well north of their 10-year average when compared to earnings generation.
For what it's worth, outgoing chair Yellen told CBS's "Sunday Morning" program that, while she didn't want to say valuations were "too high" ... "I do want to say high.
"Price-earnings ratios are near the high end of their historical ranges," she said, noting that this was "a source of some concern" among her colleagues.
None of that, course, erases last week's 4.09% decline for the Dow Jones Industrial Average, or the 3.83% pullback for the broader S&P 500, both of which are the largest 5-day declines in two years.
And with an unusually light calendar for earnings and economic data this week -- highlighted only by figures from Viacom (V) , Walt Disney Corp. (DIS) , General Motors (GM) and Tesla (TSLA) -- market sentiment is very likely to be dictated by Powell's first public comment as Fed chair and the consensus of his fellow voting members on the FOMC.
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