INVESTOR’S first read.com – Daily edge before the open
S&P 500: 2,995
Russell 2000: 1,555
Friday July 19, 2019 9:22 a.m.
June’s Leading Economic Indicators (LEI) posted its biggest decline in three years, a reminder to investors the 10-year economic expansion is slowing, and may be in the early stages of recession.
Based on 10 key components of economic health, the LEI dropped 0.3% in June. New orders for manufacturing, housing permits and unemployment insurance filings contributed to the decline.
The index has been struggling since February as March and April posted gains of only 0.1% and May was zero.
The S&P 500 is one of the 10, so it was not a drag on the index.
On that subject, the most reliable “leading” indicator of a recession is the stock market, turning up prior to economic recoveries and down prior to the beginning of recessions.
Recent strength in stock prices reflects the Street’s expectation of a fed funds rate cut on the 31st (next Wednesday).
Minor Support: DJIA:27,246; S&P 500:2,997;Nasdaq Comp.:8,214
Minor Resistance: DJIA:27,318; S&P500:3,004;Nasdaq Comp.:8,213
Thursday (July 18) “Why, Oh Why, Would the Fed Cut Rates ???”
The Street has celebrated a cut in the Fed funds rate on the 31st in advance, without considering two things. One, it may not happen. Two, the Fed would be doing so to head off a recession.
No recession has ever occurred without a bear market accompanying it. In fact, Fed interest rate cuts have preceded all recessions in the last 50 years.
So why the celebration ?
Does the Street believe the Fed can prevent a recession ?
If it can’t, the stock market is headed south, especially since it is significantly overpriced. Based on the Shiller price/earnings ratio, the S&P 500 is pricier than at any time ever except the 2000 – 2002 bubble-burst fiasco, which triggered a 50% drop in the S&P 500 (78% drop Nasdaq Comp.).
Buyers of stocks are seeking some kind of yield, since that is no longer possible in bonds. That’s fine so long as an investor doesn’t see the value of their stocks drop 20% or more.
At some point, buyers will walk away, realizing paying up for stocks with the risk of recession running high. That will contribute to a downdraft in stocks. That will trigger selling in stocks. That will be the beginning of a bear market.
There are no “new eras.” Reality rules. At best, the Fed can delay a recession/bear market, it will happen.
Wednesday (July 17) “Street Awaits Q2 Earnings + Fed Rate Cut”
Q2 earnings will have an impact on stocks this month. FactSet is expecting S&P 500 Q2 earnings to decline 3.0%, however for all of 2019, it is forecasting a gain of 4.3%.
Any growth better or worse than that will impact the market accordingly.
At this point, the Fed calls the shots. It has not done anything with interest rates, but is expected to cut its fed funds rate on July 31.
The Fed has managed to run stock prices up 28% since Late December with rhetoric alone after it abruptly changed Fed policy from restraint to ease, surprisingly days after raising its rate December 19 !!
While the Fed is responding to a global foot race to cut interest rates (some to negative), in face of global economic weakness, I think the US Fed sees a recession looming and wants to head it off before 2020, a presidential election year.
No recession has ever occurred without a bear market, which tend to start (and end) before a recession is officially declared.
FYI: generally, a recession is declared after two consecutive declines in the GDP. Officially, the National Bureau of Economic Research (NBER) makes that decision bases on a host of data, and with a lag time of months.
What to do: The market is pricey ! But speculative fever is running high so it can go higher. At these levels, RISK is high, and the new normal for stock prices is for sharp corrections rather than slow trending ones. A cash reserve of 30%-35% is a good idea.
Tuesday (July 16)
If the Fed Can Prevent a Recession
First, re-read yesterday’s post below.
If the Fed can prevent a recession with an interest rate/QE policy,
we won’t have a bear market, but will have corrections of 5% – 11% from time to time, assuming we don’t have a runaway speculative binge leading to a bubble burst and correction in excess of 30%.
This happened at the 2000 – 2002 dot-com bull market top, one which led to a 50% drop in the S&P 500 and 78% plunge in Nasdaq Comp. index.
Currently the Shiller cyclically adjusted price/earnings ratio for the S&P 500 is 30.74, 85% above its historic mean. The high for the S&P’s P/E in the dot-com boom was 44.19, hit in December 1999.
Today’s market is not driven by hundreds of absurdly overpriced stocks as was the case in 2000 – 2002, so a P/E of 44 won’t be achieved.
Clearly, the Fed has the Street’s back. Any major decline will be met with Fed action or just verbal hype up to a point.
If the fed fails to prevent a recession, we will have a bear market, and all those investors who rushed it to buy at current levels will get hammered.
Monday (July 14)
There Has Never Been a Recession Without a Bear Market
ONE: There is one reason the Fed abruptly reversed its interest rate policy from restraint to ease – It sees a serious risk of RECESSION.
TWO: There has never been a recession that has NOT been accompanied by a bear market (decline ranging from S&P 500 20% to 55%). There have been bear markets that were NOT accompanied by recessions ( 1961-1962, 1966, 1971, 1987).
The buyers’ panic we are seeing now, which started four days ago with Fed hints of a rate cut and with the S&P 500 more overvalued than at any time except the 2000-2002, dot-com bubble burst (S&P 500 down 50%, Nasdaq Comp. down 78%) has all the makings of becoming another a bubble burst.
In January, the Fed reversed policy to one of “ease” when the S&P 500 plunged 20% in Q4. Since then, it has nurtured the stock market back up with hints of a rate cut and misleading comments about stock values and the economy’s health.
Obviously, the Street is assuming the Fed will be able to prevent a recession, ergo, the heavy buying. If they are wrong, we will have a nasty bear market which will be devastating to all investors especially, those rushing in to buy at these levels.
Even if the Fed can prevent a recession, stocks are pricey at these levels.
Friday (July 12) “Oh My, Not Another Perfect Storm”
Three of the Dow’s 30 stocks, Goldman Sachs (GS +4.54), United Healthcare (UNH +12.41), and Boeing (BA +6.65) accounted for 160 points of the Dow’s 227-point rise (70%) yesterday, while the broader based S&P 500 advanced less than a third as much, the Nasdaq Comp. declined as did the unweighted Value Line Composite.
Yesterday, the DJIA gave the impression the market was hotter than it was, and that distortion could be a warning sign.
This is the fourth time the DJIA and S&P 500 have probed this area since January 2018 after interim plunges of 12% (Jan/Feb 2018); 20% (Q4 2018) and 8% (May/June 2019).
The last two rebounds were mostly orchestrated by comments by Fed Chief Jerome Powell who came close to guaranteeing the Street the Fed will cut interest rates.
Again, I ask – WHY does the Fed see a need to cut rates ?
Again, I add -the Fed must expect a recession, and clearly they don’t want that to happen just prior to, or during a presidential election year.
Sooooo, at least verbally, the Fed is talking the stock market up, sucking investors in to stocks even knowing there is a high risk of recession conditions that have always hammered stocks.
The responsible thing to do would be to outline what the economy’s problems are -manufacturing, home building costs (tariffs), consumer spend, excess debt at all levels, and risk for equities.
With interest rates tanking, investors are seeking a return in stocks, which thanks to Fed hype, are providing that through appreciation and to a lesser degree– a dividend yield.
Ironically, it is the institutions who are getting sucker punched this time, the little guy has been selling having sold $25 billion of stocks in the week ending July 2 as the market was hitting new highs.
Yet, another PERFECT STORM !
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 120 months, the longest in history, 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 is 3.6% which was hit in May. Technically, we won’t know when the start of the current recession is official for months after the fact, since that conclusion is reached by the Nat’l Bureau of Economic Research (NBER) and they consider host of economic indicators.
>Bear markets lead the beginning of recessions by 3 to 12 months. The current bull market at 123 months is 4 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.
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