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Business

Fed’s Powell sparked a 1,000-point rout in the Dow. Here’s what investors should do next.

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Now might be the time to consider hiding out in short-dated Treasurys or corporate bonds and other defensive parts of the stock market.

On Friday, Federal Reserve Chairman Jerome Powell talked of a willingness to inflict “some pain” on households and businesses in an unusually blunt Jackson Hole speech that hinted at a 1970s-style inflation debacle, unless the central bank can rein in sizzling price gains running near the highest levels in four decades.

Read: Fed’s Powell says bringing down inflation will cause pain to households and businesses in Jackson Hole speech

Powell’s strident stance had strategists searching for the best possible plays that investors can make, which may include government notes, energy and financial stocks, and emerging-market assets.

The Fed chair’s willingness to essentially break parts of the U.S. economy to curb inflation “obviously benefits the front end” of the Treasury market, where rates are moving higher in conjunction with expectations for Fed rate hikes, said Daniel Tenengauzer, head of markets strategy for BNY Mellon in New York. 

To his point, the 2-year Treasury yield
TMUBMUSD02Y,
3.384%
hit its highest level since June 14 on Friday, at 3.391%, after Powell’s speech — reaching a level last seen when the S&P 500 officially entered a bear market.

Investors might consider making a play for the front end of credit markets, like commercial paper, and leveraged loans, which are floating-rate instruments — all of which take advantage of the “most clear direction in markets right now,” Tenengauzer said via phone. He’s also seeing demand for Latin American currencies and equities, considering central banks in that region are further along in their rate-hiking cycles than the Fed is and inflation is already starting to decline in countries like Brazil. 

A Fed battle cry

Powell’s speech was a moment reminiscent of Mario Draghi’s “do whatever it takes” battle cry a decade ago, when he pledged as then-president of the European Central Bank to preserve the euro during a full-blown sovereign-debt crisis in his region.

Attention now turns to next Friday’s nonfarm payroll report for August, which economists expect will show a 325,000 job gain following July’s unexpectedly red-hot 528,000 reading. Any nonfarm payrolls gain above 250,000 in August would add to the Fed’s case for further aggressive rate hikes, and even a 150,000 gain would be enough to generally keep rate hikes going, economists and investors said.

The labor market remains “out of balance” — in Powell’s words — with demand for workers outstripping supply. August’s jobs data will offer a peek into just how off kilter it still might be, which would reinforce the Fed’s No. 1 goal of bringing inflation down to 2%. Meanwhile, continued rate hikes risk tipping the U.S. economy into a recession and weakening the labor market, while narrowing the amount of time Fed officials may have to act forcefully, some say.

“It’s a really delicate balance and they’re operating in a window now because the labor market is strong and it’s pretty clear they should push as hard as they can” when it comes to higher interest rates, said Brendan Murphy, the North American head of global fixed income for Insight Investment, which manages $881 billion in assets.

“All else equal, a strong jobs market means they have to push harder, given the context of higher wages,” Murphy said via phone. “If the labor market starts to deteriorate, then the two parts of the Fed’s mandate will be at odds and it will be harder to hike aggressively if the labor market is weakening.”

Insight Investment has been underweight duration in bonds within the U.S. and other developed markets for some time, he said. The London-based firm also is taking on less interest-rate exposure, staying in yield-curve flattener trades, and selectively going overweight in European inflation markets, particularly Germany’s.

For Ben Emons, managing director of global macro strategy at Medley Global Advisors in New York, the best combination of plays that investors could take in response to Powell’s Jackson Hole speech are “to be offense in materials/energy/banks/select EM and defense in dividends/low vol stocks (think healthcare)/long the dollar.”

‘Tentative signs’

The depth of the Fed’s commitment to stand by its inflation-fighting campaign sank in on Friday: Dow industrials
DJIA,
-3.03%
sold off by 1,008.38 points for its largest decline since May, leaving it, along with the S&P 500
SPX,
-3.37%
and Nasdaq Composite
COMP,
-3.94%,
nursing weekly losses. The Treasury curve inverted more deeply, to as little as minus 41.4 basis points, as the 2-year yield rose to almost 3.4% and the 10-year rate
TMUBMUSD10Y,
3.042%
was little changed at 3.03%.

For now, both the inflation and employment sides of the Fed’s dual mandate “point to tighter policy,” according to senior U.S. economist Michael Pearce of Capital Economics. However, there are “tentative signs” the U.S. labor market is beginning to weaken, such as an increase in jobless claims relative to three and four months ago, he wrote in an email to MarketWatch. Policy makers “want to see the labor market weakening to help bring wage growth down to rates more consistent with the 2% inflation target, but not so much that it generates a deep recession.”

With an unemployment rate of 3.5% as of July, one of the lowest levels since the late 1960s, Fed officials still appear to have plenty of scope to push forward with their inflation battle. Indeed, Powell said the central bank’s “overarching” goal is to bring inflation back to its 2% target and that policy makers would stand by that task until it’s done. In addition, he said they’ll use their tools “forcefully” to bring that about, and the failure to restore price stability would involve greater pain.

Front-loading hikes

The idea that it be might be “wise” for policy makers to front-load rate hikes while they still can seems to be what’s motivating Fed officials like Neel Kashkari of the Minneapolis Fed and James Bullard of the St. Louis Fed, according to Derek Tang, an economist at Monetary Policy Analytics in Washington. 

On Thursday, Bullard told CNBC that, with the labor market strong, “it seems like a good time to get to the right neighborhood for the funds rate.” Kashkari, a former dove who’s now one of the Fed’s top hawks, said two days earlier that the central bank needs to push ahead with tighter policy until inflation is clearly moving down.

Luke Tilley, the Philadelphia-based chief economist for Wilmington Trust Investment Advisors, said the next nonfarm payroll report could come in either “high or low” and that still wouldn’t be the main factor behind Fed officials’ decision on the magnitude of rate hikes.

What really matters for the Fed is whether the labor market shows signs of loosening from its current tight conditions, Tilley said via phone. “The Fed would be perfectly fine with strong job growth as long as it means less pressure on wages, and what they want is to not have such a mismatch between supply and demand. Hiring is not the big deal, it’s the fact that there are so many job openings available for people. What they really want to see is some mix of weaker labor demand, a decline in job openings, stronger labor-force participation, and less pressure on wages.”

The week ahead

Friday’s August jobs report is the data highlight of the coming week. There are no major data releases on Monday. Tuesday brings the S&P Case-Shiller home price index for June, the August consumer confidence index, July data on job openings plus quits, and a speech by New York Fed President John Williams.

On Wednesday, Loretta Mester of the Cleveland Fed and Raphael Bostic of the Atlanta Fed speak; the Chicago manufacturing purchasing managers index is also released. The next day, weekly initial jobless claims, the S&P Global U.S. manufacturing PMI, the ISM manufacturing index, and July construction spending data are released, along with more remarks by Bostic. On Friday, July factory orders and a revision to core capital equipment orders are released.

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Health

Why do you test negative on an antigen test with COVID-19 symptoms? Do you really have flu? Not necessarily — here’s why

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You have a blistering headache. Your body aches. You’ve developed a cough. You’re sneezing. But you test negative on an antigen test. Do you have COVID-19, the disease caused by the virus SARS-CoV-2? Or the flu? Or flurona — both?

It’s a stressful dilemma and an increasingly common question. Flu season is upon us. Omicron is upon us. If you have a flu vaccine and/or a COVID-19 vaccine, your immune system will kick in faster to fight the virus. And then you start to feel sick.

You isolate for at least 5 full days — day zero being the first day of symptoms — because that’s the responsible thing to do. Yet you still have your sense of taste and smell. You don’t want to infect others, and still your antigen tests come up negative.

As the omicron variant sweeps across the world, and flu season takes hold, how can you tell the difference? Until you finally get that positive COVID-19 antigen test — if you’re lucky enough to find one — the truth is it’s almost impossible to tell.

“Get vaccinated, get boosted, wear a mask in public indoor settings in areas of substantial and high community transmission, and take a test before you gather,” says Rochelle Walensky, director of the U.S. Centers for Disease Control & Prevention.

COVID-19 and flu symptoms are practically the same

But how do you know if you have the flu or COVID-19? Both may involve fever, cough, shortness of breath/difficulty breathing, fatigue, sore throat, runny or stuffy nose, body aches, headache, vomiting, diarrhea, change in or loss of taste or smell.

The CDC says a loss or change in taste or smell is more common in COVID-19, but it’s not a precondition for having omicron, the highly transmittable variant that’s blazing a trail across schools, workplaces and family gatherings.

Omicron and delta pose a greater threat for those who are not vaccinated, but a persistent dry cough and shortness of breath are clearly two symptoms that could point to COVID-19, especially if you were exposed to someone who tested positive.

Do you see the Catch 22? The flu and COVID-19 have near identical symptoms. Despite all the guidelines helping people to distinguish between the two, a positive rapid antigen test is still the only surefire way of knowing which illness you have.

Repeatedly testing negative with COVID-19 or flu symptoms

Those tests are not one and done. Someone with COVID-19 and suffering from symptoms may still test negative on antigen tests for 1-3 days before the virus grows. However, Michael Mina, an epidemiologist, contends that is a good thing.

Vaccines help our immune system recognize and fight the virus, and that creates symptoms. “This is expected,” he wrote on Twitter. “Symptoms don’t = contagious virus. This is literally a reflection of the fact that vaccines are doing their job!”

That’s why we feel horrible even when we’re negative. “We recognize the virus quickly after it lands in us, we develop symptoms, we kind of fight it off, then it often eventually wins, and grows fast AFTER immunity/symptoms started,” he added.

“Thus, if you are symptomatic and negative — although it means you’re probably not contagious at that moment, be very very cautious,” Mina adds. “Quarantine even if possible and test the next morning or that night. (Sometimes even longer.)”

Isolate and test with symptoms. But when do you exit isolation?

How do you interpret those rapid tests? One red line is negative, while two red lines means positive. A stronger second red line likely means you’re at your most infectious. A lighter red line means you’re at the beginning or end of your infection.

When and how you exit isolation has just gotten trickier. The CDC is maintaining its position on its isolation policy, instructing people who had symptoms and who have access to a test to take one before exiting isolation. But it does not require it.

Even if you are less contagious after your symptoms have alleviated, the CDC’s critics argue that this creates another gray area of confusion, and puts the onus on the individual to make decisions that are best left up to public-health officials.

The CDC’s explanation: “The majority of SARS-CoV-2 transmission occurs early in the course of illness, generally in the 1-2 days prior to onset of symptoms and the 2-3 days after.” That, however, was before omicron spread like wildfire.

This stance has divided public opinion, and frustrated some epidemiologists. Many public-health advocates say it’s safer to get that negative antigen test before going out into the world. For his part, Mina called the CDC guidelines “reckless.”



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Business

Tesla must rehire fired worker and Elon Musk must delete anti-union tweet, NLRB rules

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The National Labor Relations Board on Thursday ordered Tesla Inc. to reinstate an employee it fired in 2017 and said Chief Executive Elon Musk must remove a three-year-old tweet urging against unionizing.

The NLRB in Washington, D.C., agreed with a 2019 ruling by an NLRB judge in California, who found that the electric-car maker violated labor laws related to unionization efforts at its Fremont, Calif., plant.

Tesla
TSLA,
+1.61%
must offer to reinstate Richard Ortiz to his former job as a production associate within 14 days, as well as give him back pay and benefits. The company must also compensate him for any resulting tax consequences, according to the ruling.

Tesla said in filings that Ortiz was fired for lying during an investigation into a Facebook post about union activity at the company.

Margo Feinberg, an attorney with Schwartz, Steinsapir, Dohrmann & Sommers who was retained by the United Auto Workers on behalf of Ortiz, told MarketWatch on Thursday that as far as she knows, Ortiz had wanted to return to work at Tesla.

The decision in the Tesla case, first reported by Bloomberg News, comes as the Protect the Right to Organize (PRO) Act, or HR 482, was passed by the House earlier this month. The legislation — which would give workers new protections when they seek to unionize and penalize companies that violate workers’ rights — is expected to be taken up by the Senate.

See: PRO Act, called ‘most important labor legislation in several generations,’ passes House

“If this was OSHA, there would be fines,” Feinberg said. “The NLRB ruling is not enough, but it’s an important message.”

“Ultimately, we need reform,” she added, saying the PRO Act would provide for injunctive relief and damages in a case like this.

The UAW echoed that sentiment.

“While we celebrate the justice in today’s ruling, it nevertheless highlights the substantial flaws in U.S. labor law,” said UAW Vice President Cindy Estrada in a statement. “Here is a company that clearly broke the law and yet it is three years down the road before these workers achieved a modicum of justice.”

As for the tweet by Musk that must be taken down, the NLRB deemed it to be threatening. In 2018, as the UAW continued to try to organize Tesla employees, the Tesla CEO tweeted: “Nothing stopping Tesla team at our car plant from voting union. Could do so tmrw if they wanted. But why pay union dues & give up stock options for nothing? Our safety record is 2X better than when plant was UAW & everybody already gets healthcare.”

Tesla must also delete a warning from the file of another employee who was disciplined when he interacted with Ortiz about union-related activity, the NLRB said in its Thursday ruling. The company was additionally ordered to rescind rules barring employees from distributing union-related literature during non-work hours and from wearing union insignia, and threatening, disciplining or terminating an employee over union activity. In addition, Tesla must post a notice at its plant that it was found to have violated labor law.

The company must also delete language from a confidentiality agreement it asks employees to sign that they cannot talk to the media, because labor law “protects employees when they speak with the media about working conditions, labor disputes or other terms and conditions of employment.”

The company, which has reportedly dissolved its public relations team, has not returned a request for comment.

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Business

Despite surging stocks and home prices, U.S. inflation won’t be a problem for some time

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When America’s amusement parks and baseball stadiums no longer must serve as COVID-19 mass vaccination sites, some investors believe that households pocketing pandemic financial aid from the government might start to splurge.

While a consumer splurge could initially boost the parts of the economy devastated by the pandemic, a bigger concern for investors is that a sustained spending spree also could cause prices for goods and services to rise dramatically, dent financial asset values, and ultimately raise the cost of living for everyone.

“I don’t think inflation is dead,” said Matt Stucky, equity portfolio manager at Northwestern Mutual Wealth Management Company. “The desire by key policy makers is to have it, and it’s the strongest it’s ever been. You will see rising inflation.”

Wall Street investors and analysts have become fixated in recent weeks on the potential for the Biden Administration’s planned $1.9 trillion fiscal stimulus package that targets relief to hard-hit households to cause inflation to spiral out of control.

Economists at Oxford Economics said on Friday they expect to see the “longest inflation stretch above 2% since before the financial crisis, but it’s unlikely to sustainably breach 3%.”

Severe inflation can hurt businesses by ratcheting up costs, pinching profits and causing stock prices to fall. The value of savings and bonds also can be chipped away by high inflation over time. 

Another worry among investors is that runaway inflation, which took hold in the late 1970s and pushed 30-year mortgage rates to near 18%, could force the Federal Reserve to taper its $120 billion per month bond purchase program or to raise its benchmark interest rate above the current 0% to 0.25% target sooner than expected and spook markets.

At the same time, it’s not far-fetched to argue that some financial assets already have been inflated by the Fed’s pedal-to-the-metal policy of low rates and an easy flow of credit, and might be due for some cooling off.

U.S. stocks, including the Dow Jones Industrial Average
DJIA,
+0.09%,
S&P 500 index
SPX,
+0.47%
and Nasdaq Composite
COMP,
+0.50%
closed on Friday at all-time highs, while debt-laden companies can now borrow in the corporate “junk” bond, or speculative-grade, market at record low rates of about 4%.

Read: Stock market stoked by stimulus hopes — what investors are counting on

In addition to rallying stocks and bonds, home prices in the U.S. also have gone through the roof during the pandemic, despite the U.S. still needing to recoup almost as many jobs from the COVID-19 crisis as during the worst of the global financial crisis in 2008.

This chart shows that jobs lost to the pandemic remain near to levels seen in the aftermath of that last crisis.

Job losses need to be tamed


LPL Research, Bureau of Labor Statistics

Fed Chairman Jerome Powell said Wednesday that he doesn’t expect a “large or sustained” outbreak of inflation, while also stressing that the central bank remains focused on recouping lost jobs during the pandemic, as the U.S. looks to makes serious headway in its vaccination program by late July. 

Treasury Secretary Janet Yellen on Friday reiterated a call on Friday that the time for more, big fiscal stimulus is now.

“Broadly, the guide is, does it cost me more to live a year from now than a year prior,” Jeff Klingelhofer, co-head of investments at Thornburg Investment Management, said about inflation in an interview with MarketWatch.

“I think what we need to watch is wage inflation,” he said, adding that higher wages for upper income earners were mostly flat for much of the past decade. Also, many lower-wage households hardest hit by the pandemic have been left out of the past decade’s climb in financial asset prices and home values, he said.

“For the folks who haven’t taken that ride, it feels like a perpetuation of inequality that’s played out for some time,” he said, adding that the “only way to get broad inflation is with a broad overheating of the economy. We have the exact opposite. The bottom third are no where near overheating.”

Klingelhofer said it’s probably also a mistake to watch benchmark 10-year Treasury yields for signs that the economy is overheating and for inflation since, “it’s not a proxy for inflation. It’s just a proxy for how the Fed might react,” he said.

The 10-year Treasury yield
TMUBMUSD10Y,
1.209%
has climbed 28.6 basis points in the year to date to 1.199% as of Friday.

But with last year’s sharp price increases, is the U.S. housing market at least at risk of overheating?

“Not at current interest rates,” said John Beacham, the founder and CEO at Toorak Capital, which finances apartment buildings and single family rental properties, including those going through rehabilitation and construction projects.

“Over the course of the year, more people will go back to work,” Beacham said, but he added that it’s important for policy makers in Washington to provide a bridge for households through the pandemic, until spending on socializing, sporting events, concerts and more can again resemble a time before the pandemic.

“Clearly, there likely will be short-term consumption increase,” he said. “But after that it normalizes.”

The U.S. stock and bond markets will be mostly closed on Monday for the Presidents Day holiday.

On Tuesday, the only tidbit of economic data comes from the New York Federal Reserve’s Empire State manufacturing index, followed Wednesday by a slew of updates on U.S. retail sales, industrial production, home builders data and minutes from the Fed’s most recent policy meeting. Thursday and Friday bring more jobs, housing and business activity data, including existing home sales for January.

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