Oil prices surge to two-week winning streak as Iran supply fears grip markets
Over the last few weeks, it seemed all but a done deal that Kevin Hassett would replace Jerome Powell as the next Fed Chair. That changed this past weekend as President Trump added Kevin Warsh alongside Hassett as his top Fed contenders. It’s likely that there are a couple of factors leading Trump to add Warsh to the race.
First, the Financial Times indicated that the Treasury Department was soliciting feedback from Wall Street banks and large asset management firms. In these private conversations, investment professionals expressed concern that Hassett would prioritize Trump’s demands for sharp rate cuts over a more appropriate data-driven policy. Furthermore, if the Fed were to pursue an unwarranted monetary policy, it would pose risks to bond markets and to Fed credibility.
Second, the bond market was sending a cautionary signal. Treasury yields have been slowly creeping higher over the last few weeks as the market comes to terms with Hassett as the next Fed Chair. Since early December, when 10-year UST yields fell below 4%, yields have steadily risen. After topping at 4.25% last Friday, they have since backed off.
The betting odds shown below and bond market yields will be telling in the coming weeks and months. We suspect that higher odds for Warsh will correspond to lower yields, and vice versa.
Tomorrow’s Commentary will have more on the differences between Hassett and Warsh, and how the bond and stock markets may view the selection of each potential nominee.
Small Caps In Vogue While Large Caps Languish
After grossly underperforming the market, small-cap stocks are finally having their day in the sun. As noted below, MicroCap stocks, along with small caps, are among the most overbought. At the same time, MegaCap and Large Growth are the most oversold. Interestingly, the rotation toward smaller stocks and away from larger stocks is not about investors seeking more conservative, value-oriented companies. To wit, note that Low Beta stocks are very oversold while High Beta stocks are overbought. The market is generally favoring value over growth. For instance, Mid and Small Cap Value are among the most overbought, while the growth versions of those same size factors are less overbought and further down the list.
We caution readers against overanalyzing sector and factor rotations at this time of year. Distortions tend to occur at year-end, as many institutional money managers take gains and losses and window-dress their books. Often, rotations toward the last few weeks of December are fast and not lasting.
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