U.S. stocks were trading higher on Monday as bad-to-less-good economic news has come into play at a time when the markets and economists are trying to factor trade war and tariffs into their mix. The stock market seems to be gunning for a more dovish Federal Reserve since Fed Chairman Jerome Powell previously said that the central bank is monitoring developments and that it would act to sustain U.S. economic expansion. This may still be too soon to expect a rate cut from the FOMC, but what investors ware wanting to hear is a more dovish tone.
24/7 Wall St. has tracked multiple views on the matter of the “when and if” rate cuts will arrive. It may be too soon to call for a June rate cut at this week’s Federal Open Market Committee (FOMC) meeting, but the odds are stronger for rate cuts ahead. We are also looking at some of the most recent data to see how equity strategists are calling for the overall stock market to do for the rest of 2019.
While it is always easy to find bullish and bearish commentary, this first look is that the situation remains a glass that is half-full. It’s also important to keep in mind that one tweet or one day can change all those views faster than most market players can react.
The CME FedWatch Tool now sees a 77.5% that Fed Funds will remain in the 2.25% to 2.50% range on the June 19 announcement. The July 31 FOMC meeting is now considered as “live” with a 68% chance that the Fed Funds rate will drop down to 2% to 2.25%. There is no FOMC meeting in August, but that FedWatch Tool is now even calling for a 53.9% chance of Fed Funds being down at 1.75% to 2% at the September 18 FOMC announcement. The odds of rates going down to a range of 1.50% to 1.75%, implying three rate cuts by the Fed, is 26.1% for the Oct. 30 FOMC announcement and 35.7% for the Dec. 11 FOMC announcement.
Credit Suisse has issued a note from its equity strategy team on June 17 that a so-called market market melt-up is currently more likely than a meltdown. Its view is that (equity) markets will be higher by year’s end, but they are also remaining close to benchmark weightings until there is more trade clarity, a rise in Chinese money supply and U.S. purchasing manager data, a non-inverted U.S. yield curve, and also confirmation that earnings revisions are turning higher. While this is a lot to wait for, the Credit Suisse team said:
On balance, we think there is more risk of a ‘melt-up’ than a meltdown, and find that we are more positive than most of the clients we meet.
S&P Global has also issued its own equity market forward-looking analysis on June 17. Its S&P 500 Index target of 2,900 set in January was already achieved and the firm plans to make further updates to its forecasts after earnings season. The equity portfolio managers’ views said:
U.S. equities rebounded from mid-week weakness that was partially driven by the attack on shipping in the Gulf of Oman. The energy sector led the way after crude oil spiked higher, despite the negative overall 2019 supply-overhang outlook for gas and oil prices. The market’s reaction to the attack was muted compared to previous escalations. U.S. shale oil production seems to have mitigated what would have otherwise historically been a larger reaction to rising Middle East oil-supply tensions. The stock market is still trading below the highs set in late April and early May, and it waits to be seen if the market has resumed an uptrend since the start of June. The S&P 500 forward valuation is still below its three-year average, as earnings growth expectations for the next twelve months stabilizes at 4.1% despite ongoing China-tariff concerns.
Canaccord Genuity has stuck by its view that a slowing economy is the base case for a bull market. Their equity strategy team, said on June 10:
There is no question the economy is slowing dramatically, but contrary to popular market opinion, that has always been the bull case for equities in 2019 … As the weaker data fuel recession fear, it is difficult to remember that it is, in fact, the base case for our bullish view. The slower economic activity gives the Fed room to fix the policy mistake(s) in 2018, like what took place following the sharp rise in rates in 1994 that almost drove the U.S. economy into recession. It was the two-rate-cut “tweaks” in July and December of 1995 due to a sharp slowing in economic activity that kept credit, the economy, and the market moving higher.
Also on June 10, Merrill Lynch’s technical strategists said that, among plenty of macro noise out there, that the comparisons to 2016 and 2012 live on. The technical teams call is for equities (S&P 500) to rise above 3,000. That report noted:
The S&P 500 held big 2800 to 2722 support to keep the trend intact for a move beyond the 2941 to 2954 highs with upside counts to 3250 to 3285.
On May 30, after the “sell in May” pressure was immense, State Street Global (which runs the SPDR ETFs) noted that even a slowing economy has always been the bull case for equities in 2019. The team dispelled market fears and said that the lengthy cycle is heading into extra innings. Their view is to play solid dividend growers and also lower-beta factors for lower volatility than the broader market.
UBS’s team in recent days has tried to temper rate cut expectations that the market is hoping for from Jerome Powell and the FOMC. Its last equities view from late May was calling for 1) global economic growth to stabilize in the second half of 2019 and 2) oil prices to make further gains over the next six months. Still, with the risks rising around China-U.S. trade negotiations, the group said:
Assuming the risk scenarios we are monitoring do not materialize, we believe equities can advance moderately. Equity valuations look fair rather than expensive and with an attractive equity risk premium stocks remain attractively valued relative to bonds. We overweight Canadian equities versus Swiss stocks. Swiss equity valuations are relatively unattractive while a firm oil price should sustain energy earnings. We also have an overweight in Japanese equities versus eurozone equities. While both the eurozone and Japan are heavily geared to the global cycle, the former has priced in a macro recovery while the latter has not. Eurozone stocks look expensive compared to the Japanese market.
UBS also showed that its views was to look at global quality stocks. On the U.S. stock markets, they noted for clients to use a “buy-write” strategy on U.S. equities, a smart beta strategy and some protection via put options on U.S. equities.
There are always differing views among Wall Street and Main Street investing groups. You can always find plenty of bulls and bears, and these are just some of the calls telling investors not to worry that the sky is falling.