STOCKS DO NOTHING, YELLEN SPEAKS: Here's what you need to know

Stocks did nothing ahead of a three-day weekend in the US as was more or less expected with trading volumes declining steadily during the week.

Federal Reserve chair Janet Yellen also spoke at an event at Harvard on Friday, making just brief remarks suggesting that if the economy continues to improve the Fed could raise interest rates in the coming months.

First, the scoreboard:

  • Dow: 17,864, +36, (+0.2%)
  • S&P 500: 2,098, +8, (+0.4%)
  • Nasdaq: 4,930, +29, (+0.6%)
  • WTI crude oil: $49.50, +0.1%
  • 10-year Treasury: 1.85%

Federal Reserve

Federal Reserve chair Janet Yellen thinks there will probably be a case for raising interest rates in the coming months, putting the potential for a Fed move at their June or July meeting squarely on the table.

Speaking at an event at Harvard on Friday, Yellen said, “It’s appropriate — and I’ve said this in the past — for the Fed to gradually and cautiously increase our overnight interest rate over time… Probably in the coming months such a move would be appropriate.”

Yellen spoke with Harvard economist Gregory Mankiw at the university Friday, commenting on policy only after both Mankiw and Yellen shared a laugh over a Bloomberg report from Thursday that quoted bond traders dismayed by Yellen’s scheduled appearance ahead of a long weekend.

US markets are closed on Monday in observation of the Memorial Day holiday.

More significantly, Yellen will speak on June 6 in Philadelphia, just nine days before the Fed’s June 15 meeting at which the market right now roughly sees a 30% chance of an interest rate increase. And according to data from Bloomberg, market pricing puts a roughly 50% chance of an interest rate increase from the Fed at its July 27 meeting.

Elsewhere in her remarks on Friday, Yellen said the Federal Reserve simply didn’t see the financial crisis coming.

“We saw trees, and the house-price bubble was a tree,” Yellen said. But Yellen added that the connections between the decline in home prices, the securitizations of mortgages in the financial markets, and how the whole system would nearly come crashing down was just not something the Fed saw coming.

Yellen praised the job her predecessor Ben Bernanke did in staving off a full-on economic depression in the wake of the financial crisis.

US Economy

The US economy grew a bit more than first estimated in the first quarter of the year, according to the latest data from the BEA.

The second estimate of first quarter GDP released Friday morning showed the economy grew at an annualized rate of 0.8% to start the year, better than the 0.5% that was first reported but slightly less than the 0.9% that was expected by economists.

Economists at BNP Paribas noted, “The improvement from the advance estimate reflected upward revisions to private inventory investment, residential fixed investment and net exports.” Friday’s report also showed that corporate profits rose modestly over the fourth quarter, a potential sign that the “profit recession” the corporate sector has been stuck in for about the last year could be reaching a turning point.

Jason DeSena Trennert at Strategas Research Partners added that, “Productivity gains will be key from here — which is typical in the second half of the business cycle. As labour takes share in the economy (ie, corporate compensation rises are a share of corporate GDP), productivity makes the pie bigger. Consequently, we can pay both labour and capital.”

Also in economic news, the University of Michigan’s final reading on consumer confidence in May came in a bit below expectations with the reading hitting 94.7, below the 95.4 that was expected but better than the 89 seen last month.

According to Richard Curtin, chief economist for the survey, consumers remained confident that inflation would remains low and their financial prospects would continue to improve.

Howard Marks

The latest memo from Oaktree Capital’s Howard Marks made the rounds on Friday, and in it the legendary distressed investor takes shots at the politicians currently dominating the news cycle in the US and, increasingly, becoming a part of the investor conversation as the election draws near.

Marks took to task the ideas being advanced by Donald Trump and Bernie Sanders, in particular, who have argued for increasing manufacturing jobs in the US and developing trade policies aimed at bringing jobs sent overseas back to the US.

“So while we’ve lost 3.2 million jobs to China since 2001, for example, we’ve lost many times that to improvements in productivity. Perhaps if the government wants to preserve jobs it should just outlaw productivity gains,” Marks wrote.

Marks added that, “Leaving aside strategic national considerations, do we want to protect the jobs of those who work in industries where the U.S. is uncompetitive, or do we want to allow U.S. consumers as a whole to minimise their cost of living? In each case, it’s one or the other … but not both.”

Speaking of politicians, Wall Street is becoming increasingly convinced that regardless of who wins the White House in November — let’s assume it’s Hillary Clinton vs. Donald Trump — more infrastructure spending is coming to the US.

In a note to clients on Friday, CLSA’s Chris Wood broke out an index of stocks that has already been outperforming the market and could see further benefits if this spending comes to pass.

And if you want to know who’s going to win in November? Just start tracking the S&P 500 on August 8, three months before the election. If stocks are up on Election Day, it will be another Clinton in the White House. If the market is down, get ready for President Trump.


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