Will The Fed Raise Overvaluation Concerns?

Monday, September 18, 2017

This week brings us the latest Federal Market Open Committee (FOMC) two-day meeting, where Fed presidents from regions across the U.S. meet with Fed Chair Janet Yellen to discuss and decide on monetary policy. The participants convene tomorrow, and by Wednesday afternoon we look forward to a press conference with Yellen regarding any changes being made.

Literally no one expects another rate hike this time around, but most analysts are looking toward a table set for unwinding the Fed’s $4.5 trillion on its balance sheet. Formerly, some had expected interest rates to rise further before the unwinding program was to begin; language used by the Fed in its recent meetings, however, give a clearer indication of how important the Fed members find this unwinding to be.

There is an entire cottage industry dedicated to parsing phrases and changes to previous statements the Fed makes, and this week there is new material many will be interested in seeing whether the Fed will draw from. In short, these new findings are calling the current market among the most expensive — if not the most expensive — in history. A prominent strategist at Deutsche Bank (NYSE:DB) points out that an equal-weighted bond/equity portfolio has never been pricier. Morgan Stanley’s (NYSE:MS) Ruchir Sharma points out this is the first time we see all assets — from housing to stocks to bonds — at their highest levels of expense simultaneously.

According to other reports, the market is valued at four times the real economy. We appear to be at stretching points seen in both 2000 and 2007 — the years directly preceding the two most recent major market crashes. And if it stands to reason that bubbles risks increase the longer low interest rates exist, then we may at very least see more of the Fed’s conversation take up this subject. Will the Fed begin to focus more on financial stability than merely its dual mandate of low unemployment and manageable inflation?

One half of that dual mandate has been met for awhile now, but the other — inflation approaching 2% — has remained elusive, among low-to-no wage growth in the domestic labor market. Weekly metrics tracking inflation have remained frustrating to economists, demonstrating inflation creep only in fits and starts. No sooner do narratives about real traction for inflation seem to appear than new data points wipe away much of what’s asserted with a regressive swing the other direction.

That all said, the market continues to look for new all-time highs this week. Global growth, the cooling of tensions on the Pacific Rim and even Washington DC, better-than-expected outcomes from two major hurricanes and better-than-expected growth metrics in things like the Empire State Index have all contributed to the very bullish climate. The Fed has an opportunity to throw something of a wet blanket on this hot market, but perhaps doing so will assist in preventing the next crash, or at least keeping it from being too painful.

Northrop Grumman Buys Orbital ATK

Defense giant Northrop Grumman (NYSE:NOC) has announced it will acquire rocket propulsion and munitions manufacturing company Orbital ATK (NYSE:OA) for $7.8 billion in cash. This amounts to roughly $134.50 plus debt, and has sent OA shares up nearly 20% on the news. Though the North Korea headlines seem to have ebbed lately, it would seem Northrop is looking to benefit from Orbital’s expertise in missile launch and weapons technology. The deal is expected to close in Q1 2018.

Mark Vickery
Senior Editor

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