Daily Commentary

MarketMinder’s View: Kevin Warsh officially became Fed Chair last Friday, replacing Jerome Powell. While pundits have spilled far too many pixels ruminating on where he will try to steer interest rates, Warsh also has some ideas for broader Fed reforms. For instance, during last month’s Congressional confirmation hearings, he suggested dialing back all the press conferences and interviews. The article deems this a mixed bag. It acknowledges Fedspeak can stoke confusion instead of adding clarity, especially when policymakers veer from their prior guidance, but it also argues guidance and Fed forecasts are important policy tools. Overall, we think a more streamlined approach would be beneficial in theory, with actual results depending on the details and execution. Longer Fed statements came with a bigger balance sheet and more complicated (and convoluted) policy. The more Fed folks speak, the more opportunities there are for them to sow confusion and open the door to contradicting themselves. This is why former Fed head Alan Greenspan invented the art of Fedspeak in the first place, “mumbling with great incoherence” (as he put it) in order to avoid boxing the Fed into a corner. While this piece calls forward guidance a policy tool that can prevent bigger rate hikes, we see this opposite. By talking down the likelihood of rate hikes in 2021 and early 2022, the Fed ended up catching everyone by surprise with aggressive, steep hikes later in 2022. The U-turn, not the hikes themselves, sowed confusion and thus market volatility. The more the Fed defies its prior guidance, the more it diminishes its credibility. We see a lot of compelling evidence markets care more about credibility than transparency. So while we shall have to wait and see exactly how (and whether) Warsh amends the Fed’s communication protocols, we don’t think having fewer Fed utterances will be a net negative for investors.

MarketMinder’s View: There are several existing and perhaps soon-to-be publicly traded companies mentioned here, so please note MarketMinder doesn’t make individual security recommendations. Their mention is coincident to our highlighting a broader theme: With lots of buzz around a handful of high-profile Tech and Industrials firms reportedly going public soon, keep in mind “getting in early” on the next big IPO comes with its own risks. The article shows this by running through different ways investors can invest in private companies that might go public one day and explaining the potential pitfalls for each. For example, special purpose vehicles (or SPVs), private funds created to hold one specific asset, can be pricey and inefficient after management fees, upfront commissions and other costs eat into gains. ETFs boasting private assets offer more liquidity, but “federal regulations generally restrict illiquid securities to 15% of a mutual fund or ETF’s assets,” so you may end up with big sector or company concentrations, and their ETF holdings may be SPVs (see the aforementioned fees). Closed-end funds lack those regulatory limits but have a liquidity mismatch with their underlying holdings, and their market price “could vary greatly from the net value of their assets.” Some outfits tout crypto-based alternatives, but these stock “tokens” may prove invalid. And, as we have covered before, gaining early access through private markets introduces liquidity and transparency problems. All of these are worth considering before diving in. For those choosing to wait for the initial public offering (IPO), we would add that IPO often stands for “It’s Probably Overpriced.” As University of Florida Professor Jay Ritter’s research shows, most IPOs flop. Yes, there are some stories of investors hitting it big. But there aren’t many needles in that haystack. Always remember the underwriters’ goal is to maximize returns for themselves and early investors, not for people buying in on IPO day. Don’t let greed and fear of missing out on “the next big thing” push you into owning illiquid, overpriced investment vehicles. Keep your long-term goals front of mind and remember investing isn’t a get-rich-quick endeavor.

MarketMinder’s View: While jobs data are late-lagging indicators for the economy and stocks, sentiment about the job market can be telling, and this piece does an ok job showing reality probably exceeds people’s dour feelings. Hiring has been very back-and-forth over the past year or so, but that isn’t because the economy isn’t growing. Rather, fewer workers are quitting, which means fewer jobs are opening--part and parcel of a "low-hire, low-fire” labor market. Low quit rates are also why weak hiring hasn’t translated to spiking unemployment. The areas where openings are abundant include the “health care and the transportation and warehousing sectors, which are still growing at strong rates. But those jobs don’t always match what job seekers, especially recent college graduates, are searching for. Many new grads are looking for jobs in finance or tech or professional services, where jobs are relatively scarce. Workers are having to make compromises to get into the workforce.” And people are broadly anchoring to the heady job-switching days immediately post-lockdown, which means recency bias makes the present job market feel even worse than the data say it is—stability can feel like stagnation. But stocks are familiar with all of this, and job openings aren’t a forward-looking economic driver. They are an after-effect, like all jobs data are. As the first set of graphics shows, the number of openings began declining as unemployment rose in 2023, and this has largely held since. Yet US stocks are up over 100% since 2023’s start (per FactSet), despite last year’s correction and this year’s war-related volatility, in part because they have been pricing in a better-than-feared economic environment. The gap between sentiment and reality for the job market is one illustration of this. For more on the latest figures, see last week’s commentary, “False Fears Over Fine Employment.”