Market Insights

The Federal Reserve took a hawkish turn yesterday, thanks to an improving U.S. consumer.

“Household spending has been rising at a strong pace,” the central bank declared in its policy statement yesterday. It then proceeded to raise its 2019 growth forecast to 2.2 percent, up from 2.1 percent three months prior.

The move was the latest in the constantly swinging pendulum of U.S. monetary policy. Early last year, the Fed planned a string of steady rate hikes. Market volatility and global weakness forced them to stop last winter and reverse course to rate cuts in July.

But now it could be moving back in the opposite direction as reading after reading of the U.S. consumer strengthens. Retail sales have beaten estimates for the last four months. Consumer sentiment rose back above expectations last Friday. July’s consumer-credit growth crushed forecasts.

Also don’t forget about the hefty upward revision in second-quarter consumer spending. The CEOs of Bank of America (BAC) and JPMorgan Chase (JPM) have said consumers will keep the economy growing. And two industry-level analysts, Deloitte and AlixPartners, this week predicted strong holiday spending.

Growth vs Value

The Fed’s stance yesterday sharply reduce odds of another rate cut on October 30. Some other implications could soon follow.

First, it may continue the ongoing shift from growth stocks to value stocks. September has already seen historic rallies in old-fashioned companies like banks, retailers and energy. These trade at much cheaper multiples than flashy technology names. Investors have reacted by rotating money into them, looking for a rising tide to lift many boats.

Second, U.S. consumers are the most important part (two-thirds) of the world’s biggest economy. Observers, now including the Fed, increasingly see a rising strength in that same sector. Can that newer storyline overshadow fears about the trade war?

Remember money managers have cowered in safe havens for months. Now even Jerome Powell seems to think they’re mistaken. How long can they justify being loaded with bonds when the Fed is raising its GDP estimates?

In conclusion, there are always risks in the market and the trade war is nothing to ignore. But an entirely new kind of narrative, with strong domestic consumption, seems to be emerging… just in time for the holidays.