Trump's pick for Fed chair might not matter: portfolio manager

Peter Kenny
Peter Kenny

By By Peter Kenny, chief market strategist for Global Markets Advisory Group and owner of KennysCommentary.com

Themes:

  • Consumer Confidence, rose to 125.9 in October from 120.6 the prior month — the highest reading since December, 2000.
  • President Trump leaning toward Powell in the race for the next Federal Reserve Chair appointment, according to latest reports. Announcement expected this week.
  • FOMC Meeting/announcement this Tuesday/Wednesday
  • Corporate results and economic data continue to lift the floor for US equities
  • WTI crude rallies to $54.58, an 8-month high
  • 10-year T-note falls back to 2.374% after reaching a 7-month high last week

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WTI Crude Oil (Nymex) (CL=F) $54.51/bbl
Gold (Comex) (CL=F) $1,271.30/t. oz.
10-year Treasury Note yield (CBOE) (^TNX) 2.376%
Volatility S&P 500 (^VIX) 10.20
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Should investors care who Trump picks for Fed chair?

Janet Yellen’s term of Federal Reserve chair coming to an end in February and given the central importance of the chair person’s role in both market perception and actual monetary policy, the pending announcement by President Trump of his choice to head up the Fed is being very closely watched. Increasingly it appears as though Republican attorney and Obama Federal Reserve appointee Jerome Powell has the edge to replace her. Powell has a long and distinguished history in Washington D.C. going back to his time at the Treasury Department under President George H.W. Bush. More recently he very effectively managed the Federal Reserve’s handling of the Treasury debt flash crash of 2014. He is considered non-partisan, deeply experienced, well respected and seasoned.

The question in many market participants’ minds is whether Trump actually needs to replace Chair Yellen at all. Yellen is considered by many to be a protégé of sorts of former Fed Chair Ben Bernanke, and by nearly every account, regardless of political persuasion and objectively speaking, Yellen is looked upon as having done an outstanding job as Fed chair.

Given Yellen’s experience as governor while at the Fed during the financial crisis, Great Recession and stimulus that followed—and that under her watch as chair, Fed monetary policy has effectively been focused on normalization and on balance sheet reduction—Yellen will be difficult to replace. Under her leadership, the Fed managed to provide monetary stability, encourage economic growth, reduce unemployment and do so all while keeping inflation well contained.

Trump is not required to replace Janet Yellen, but the odds are great that he will. What hinders Yellen’s chances of being re-nominated by Trump is the simple fact that she was originally nominated by President Obama. Though rather political and pedestrian in light of the importance of the position, that in and of itself is reason enough for a switch at the top, at least in Washington D.C.

If, as is widely expected, Powell is elevated to the Fed chair, don’t look for any meaningful change in monetary course by the Fed or FOMC. In fact, Powell has acted to support Yellen’s monetary policy positions from the very outset of her assumption to the chair. So much so was his non-partisan approach to policy that his positions were indistinguishable from hers in many respects. Effectively, if Powell is nominated, don’t expect any meaningful departure in policy from what we have gotten accustomed to from Yellen.

There have been other names bandied about for consideration. White House Cabinet member Gary Cohn was considered a potential candidate in recent days, but given the role he is expected to play in tax reform negotiations, it is more likely that he will remain at the White House. Also under consideration in recent days has been Kevin Warsh, but given the lack of support he has received from Cabinet member Mnuchin, his chances seem very long. Finally, Stanford University’s John Taylor is widely considered to be the most aligned with Trump’s approach to growing the economy — in large part though reform.

Odds are that Powell or (less likely) Taylor will be tapped on the shoulder in coming days with an official announcement by Trump. In either case, I do not expect a significant departure from the policies that defined Yellen’s very effective tenure.

Sam Stovall | Chief Investment Strategist, CFRA

Despite the S&P 500 (^GSPC, SPY) being higher in price in August, September and thus far in October, history says that investors should not be concerned that this strength will steal from Santa. This year is on course to mark the 13th time that the “500” was higher in each of these typically challenging months. In 11 of the prior 12 times, the market recorded even higher prices by year-end, gaining an average of 3.6%. Factors that we think should keep stock prices on an upward trajectory include the projected increase in S&P 500 EPS of 10% in 2017 and 11% in 2018, a tax-cut package that is expected to be passed late this year (which has made its way into investor optimism, but not EPS estimates, due to the lack of detail), and an improvement in organic global GDP growth in 2018, now estimated at 2.8% for the U.S., vs 2.3% in 2017, and 3.9% worldwide from 3.6%.

Economic Calendar:

 

Wednesday
Motor Vehicle Sales
7:00 AM MBA Mortgage Applications
8:15 AM ADP Employment Report
9:45 AM PMI Manufacturing Index
10:00 AM ISM Mfg. Index
10:00 AM Construction Spending
10:30 AM EIA Petroleum Status Report
2:00 PM FOMC Meeting Announcement

Thursday
Chain Store Sales
7:30 AM Challenger Job-Cut Report
8:30 AM Weekly Jobless Claims
8:30 AM Productivity and Costs
9:45 AM Bloomberg Consumer Comfort Index

Friday
8:30 AM Employment Report
8:30 AM International Trade
9:45 AM PMI Services Index
10:00 AM Factory Orders
10:00 AM ISM Non-Mfg. Index
1:00 PM Baker Hughes Rig Count

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