INVESTOR’S first read.com – Daily edge before the open deal
S&P 500: 2,815
Friday, March 29, 2019 9:05 a.m.
I believe the Fed will lower its fed funds rate this summer if the economy continues to slip. The move would come after a FOMC meeting on May 31 or June 19 when a press conference is held. No presser is scheduled for July31 and no FOMC meeting scheduled for August.
That leaves the next possibility September 18. The Trump administration is determined to avoid a recession in 2020, a presidential election year and this Fed will do everything possible to accommodate it.
The Fed wants to achieve a soft landing, it wants to reverse the current economic weakness before it reaches a recession, and it will try to do that by aggressively lowering the fed funds rate, the sooner the better.
A cut in the fed funds rate preceded the last four recessions, so a move like this is ominous, unless it heads off a recession, i.e. a soft landing.
The Fed last abandoned a policy of rising rates in the early 1990s, extending the economic recovery until the recession in 2001.
I have said for months that I believe we are in the early stages of a recession, that a bear market started last October with the first leg coming in Q4 of DJIA: 19.2%, S&P 500: 20.2%, and the Nasdaq Comp. of:23.8%.
Generally, a drop of 20% in the S&P 500 comprises a bear market, but the rebound since December 26, with the help of the Fed’s timely policy change, has led technicians to disregard Q4’s action as a blip, unless of course the market heads south again to new lows.
The key here is whether the Fed can trigger a rebound in a tired economy. They already stopped the Q4 carnage with an abrupt policy change.
New DJIA support is: 25,630, S&P 500:2,806 and Nasdaq Comp: 7,651.
Bulls need a break above DJIA: 25,755; S&P 500: 2,826; Nasdaq Comp.:7,715.
EARNINGS: For 2019, FactSet expects a gain of 3.8%, Thompson Reuters ReFinitir sees a gain of 3.4%
A Morgan Stanley study shows a downturn in S&P 500 earnings growth has consistently triggered a plunge in stock prices. Analysts have been slashing 2019 earnings projections. The Street is betting on a rebound in 2020. If they start slashing projections for 2020, we have the next leg of the bear market.
Flattening Yield Curve:
Blame for Friday’s plunge in prices was shared by a flattening in the yield curve and deteriorating global economies. They were referring to the narrowing between the yield on the 10-year treasury and the 2-year to 12 basis points.
Basically, the yield curve is the difference between short-term and long-term treasury interest rates. They invert when short rates exceed long rates. An inversion has preceded 9 recessions since 1955.
However, as a precision forecaster, it has a problem, the lag time between a signal can range between one and three years. An inversion preceded the 2007-2009 financial crisis by 24 months.
In my blog Friday March 15, with Boeing (BA) now 374 but then 374, I warned it was at further risk, with the next support level at 300. I noted that as one of the Dow 30, a drop of that magnitude would take 495 points off the DJIA, a price-weighted average, Boeing being the highest priced stock in the average. This is one of those corporate crises that just won’t go away, and that is enough to scare buyers away until it drops to a level that discounts the unknown. It traded huge volume around 365, which should have been enough to turn it around, yet Friday it slipped lower. Crunch the numbers in a hundred ways, and you still can’t eliminate the nagging “what ifs.” The company has implemented a software fix for its anti-stall feature, which it believes solves its problems. If the Street accepts this, the stock should rebound and grounded planes should be put back in service.
Good news on housing. A sharp drop in mortgage rates has triggered a jump in mortgage apps, especially refinancing apps which surged 12% in the March 22 week and also purchase apps which were up 6%.
The final estimate for Q4 GDP came in at an annual rate of 2.2%, down from the last estimate of 2.6%.
Q1 auto sales are expected to drop 2.5% (y/y) according to a CNBC report.
The Richmond Fed Mfg. Index slipped across the board in March to 10 from 16 slightly below projections.
Consumer Confidence for March took a hit, the index dropping to 124.1 from 131.4.
February Housing Starts were reported Tuesday morning and were down 4.2% – not good, but more time is needed to see if lower mortgage rates take attract buyers.
In his press conference Wednesday, Fed Chief Powell noted the Fed cut its 2019 projected growth for GDP to 2.1% from 2.3%. The Trump administration is projecting growth of 3.1%.
Also Thursday, February’s Leading Economic Indicators grew at a 0.2 % rate, modest but a lot better than January’s minus 0.1% rate. Three consecutive changes in one direction or another signals a change in a economic trend. The trend over the last four months has been irregular and flat, which is what the Fed is concerned about.
On the positive last week, New Home Sales rebounded sharply 11.8%, builder sentiment picked up (but traffic down), and jobless claims slowed. However, wholesale inventories rose, factory orders were flat and the U.S government plunged deeper into the red for the nation’s first five months of its fiscal year.
……………………………………………………………….. TRADE: At this level, a resolution to the U.S./China talks is most likely priced into the market, aside from a one-day spike when a deal is announced.
What is not priced in is “no deal” or a disappointing deal, what’s more, further deterioration in the economy is not priced in either, because that raises the risk of recession (see below).
Both sides want a deal. Trump is on a wrenching losing streak and needs a win even if it means concessions, China’s industrial output is at a 17-year low.
A late April date is targeted for a trade deal.
Fed Damned if they did and damned if the didn’t:
Based on what I am seeing in reports on the economy, we need a couple months to put the government shutdown, and Q4’s crunch in the market and economy behind us. We also need to see if the Fed’s change in policy from one of raising interest rates to one of “wait and see” can head off a recession.
I think the failure of the Fed to acknowledge the seriousness of weaknesses in the economy was a huge blunder. Their referral a month ago to the economy as :”rosy” was simply not true. As a result that assessment plus a U-turn on policy triggered a stampede in the stock market.
Now, if the Fed is right and the economy heats up, they will have to return to a policy of raising rates which will turn the market down from inflated levels.
If they are wrong and the economy slips into recession, stocks will turn down from inflated levels.
Either way, the Fed has increased the risk for investors. Good news on tariffs will spike the market. That would be a good opportunity to raise cash, a lot of it.
What No One on Wall Street Wants to Hear
>We are in the late innings of an economic expansion, so a recession is a good bet. The current expansion started in June 2009, has lasted 116 months, the second longest on record and twice as long as the average length of 11 cycles since 1945.
> Of the 10 recessions since 1950, the average time between the low point in the unemployment rate and the start of a recession was just 3.8 months. The unemployment rate hit a low of 3.7 percent in November, jumped to 3.9 percent in December and to 4.0 percent in January. Now, averages include months below and above 3.8. What’s more, we won’t know when the current recession if we have one begins because that conclusion is reached by the Nat’l Bureau of Economic Research (NBER) long after the fact.
>Bear markets lead the beginning of recessions by 3 to 12 months. The current bull market at 119 months is four times the average of the last 15 bulls going back to 1957
>Nine out of the last 10 recessions have occurred with a Republican in the White House.
> While Q4 corporate profits are very impressive, analysts are dramatically slashing estimates for 2019. FactSet now sees Q1 this year at minus 3.2% down from minus 2.7% a week ago; Q2 at plus 0.3% down from plus 1.0%; Q3 at plus 1.9% down from plus 2.4% and Q4 at plus 8.5% down from plus 9.9%. For the year they see an earnings gain of plus 4.1% down from plus 4.8% a week ago.. The Street may be looking beyond 2019 to 2020 when it sees a rebound in earnings. That’s sheer insanity. By then, a recession will be underway. When the Street sees its folly, it will slash 2020 earnings like it is slashing this year’s.
>The current economic expansion has lasted 123 months. That’s 65 months (2.1x) longer than the average expansion (58.4 months) going back to 1945.
>Of the 10 recessions since 1950,the average time between the low point in the unemployment rate and the start of a recession was 3.8 Months.
> Of the 10 recessions since 1950, the average time between the low point in the unemployment rate and the start of a recession was just 3.8 months.
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Investor’s first read, is a Game-On Analysis, LLC publication for which George Brooks is sole owner, manager and writer. Neither Game-On Analysis, LLC, nor George Brooks is registered as an investment advisor. Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. References to specific securities should not be construed as particularized or as investment advice as recommendations that you or any investors purchase or sell these securities on their own account. Readers are expected to assume full responsibility for conducting their own research pursuant to investment in keeping with their tolerance for risk.