By Barbara Kollmeyer, MarketWatch
We are one day closer to seeing if Fed Chairman Jerome Powell tosses this market a life preserver.
If the Fed holds off on a long-expected rate increase, you can thank investing legend Stanley Druckenmiller and 2008-era Fed governor Kevin Warsh, says Macro Tourist blog’s Kevin Muir, in reference to a recent op-ed in The Wall Street Journal in which the two warned the central bank has missed its window for such a move.
“This op-ed is a way bigger deal than most the market participants currently appreciate,” says Muir, who believes the combined power of the two could wield some influence. Warsh — the “biggest legitimate hawk out there” — has “given tons of cover for Powell to err on the dovish side,” he notes.
And while Santa definitely has his work cut out for him if that year-end rally is still coming, Muir thinks a Fed pause will mean a rally for stocks.
But don’t go referring to Druckenmiller as a bull, as our call of the day comes from the man himself who suggests that the equity market is troubled on closer inspection. In an interview with Bloomberg Television Druckenmiller says the Fed is seeing “a bit of a mirage” by just looking at a 13% drop — this quarter — for the S&P 500.
“Because if you look inside the stock market...front-end cyclicals show a completely different picture than the defensive parts to the market. Auto stocks are down 30%, they’re not 10% or 11%, building stocks are down 35%, banks...are down 25%...the Russell is down 20%, retail equities are down over 20%. How in the world can the S&P 500 be down only 10% or 11%?” That’s because utilities, staples and pharmaceuticals—economically defensive stocks — are up, he says.
“The inside of the stock market, which is the best economist I know and which I’ve used every cycle when I’ve invested, is saying there’s something not right there,” said Druckenmiller.
He added that since 2010, corporate nonfinancial debt has increased to $6 trillion from $9.6 trillion and during that time corporate earnings have risen 27%. And the only way to explain a 60% rise in the S&P 500 during this time is “because all that borrowed money went to finance buybacks and M&A,” the Fed pushing investors to take on more risk and POTUS to do more fiscal spending.
Druckenmiller said the U.S. could be looking at a 2007-type situation, though he’s not forecasting a recession like some, or even advocating for a rate cut. He also told Bloomberg that he owns Treasurys, he’s short financial stocks and thinks cloud-computing stocks like Microsoft /zigman2/quotes/207732364/lastsale MSFT -1.08% and Salesforce /zigman2/quotes/200515854/lastsale CRM -1.68% will outperform even if the economy contracts.
But over the next three or five years, returns will be no picnic, says the investor that MoneyWeek once referred to as one of the “world’s greatest investors.”
Meanwhile, crude is pushing fresh 14-month lows of its own. The dollar /zigman2/quotes/210598269/delayed DXY +0.38% is flat and gold is going nowhere. Asia markets /zigman2/quotes/211618636/realtime XX:ADOW -0.33% had a rough session, while European markets /zigman2/quotes/210599654/delayed XX:SXXP -1.28% have struggled.
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