INVESTOR’S first read.com – Daily edge before the open deal
Friday, March 22, 2019 8:03 a.m.
I don’t think the Fed would cut its fed funds rate unless it believes a recession is unavoidable. That’s why it put its policy of raising rates on hold. The economy is definitely slowing, the global economy more so.
Like Fed Chief Powell said Wednesday, it’s a wait and see situation.
The Street sees this as a return to the good old days when the Fed verbally and policy-wise nurtured the economy and stock market along following the Great Recession/ Bear market.
If they are right, we will see new all-time highs. If wrong, a lot of investors will lose a lot of money.
This is what I have referred to as a cruise control, or an automatic pilot market.
Therein lies the danger. Just about the time investors thought it was safe to close one’s eyes, worse yet, go all-in, some on margin.
According to Fed Chief Jerome Powell, the Fed does not plan any increases in its fed funds rate this year. At his post-FOMC press conference yesterday, Powell explained, “The data we’re seeing are not currently sending a signal,” adding “When they do clarify, we will act appropriately.”
Last December, the Fed indicated it would increase its benchmark interest rate twice in 2019. The Fed reversed that policy abruptly in January in face of a global economic slowdown.
The rate has a major impact on mortgages, credit cards and borrowing in general, and is a major tool in executing its policy of heating up or cooling down the economy.
Based on what the economic reports in recent months are reflecting, that suggests a drop in the fed funds rate is imminent if the economy does not pick up.
From what I see, a cut in the fed funds rate would indicate the Fed sees an increasing possibility of a recession. The last three recessions ( 2007-2009, 2001,1990-1991) were preceded by cuts in the Funds rate, as the Fed changed policy to counter a looming recession.
While the Street would welcome a cut, it would not be a buy signal.
What is needed now is for the market to roll over into a sideways consolidation trading range where stock prices are more reasonably priced for whatever outcome develops.
If that happens, the market should trade between S&P 500 2,700 and 2,850, and 25,000 and 26,200 on the DJIA.
EARNINGS: The only change here is FactSet reduced 2019 projections for the S&P 500 further this week with 2019 coming in at +3.9%, down from +4.1% a week ago. Q1 is running at a minus 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.
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 Philly Fed Survey for February showed a sharp rebound to index of 13.7 from depressed levels, however the 6-month outlook for new orders [plunged 10.5 points to 21.8.
Also yesterday, 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.
Tuesday, Econoday.com reported Factory Orders slowed into year-end and only rose 0.1 percent in January, but capital goods (nondefense ex-aircraft) jumped 0.8 percent, indicating business investment snapped out of its doldrums. Unfortunately, at an increase of only 0.1 percent, unfilled orders reflect weakness.
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.
BREXIT: Politico urged Americans not to freak out about Brexit, quoting Allianz’s Mohamed A. El-Erian who said disorderly Brexit would be disruptive for the UK in the short-term…but less disruptive for Europe and, constitute only a blip in the US and most of the rest of the world. Thursday Britain’s Parliament approved U.K. Prime Minister Theresa May’s bid to delay Brexit until late May.
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.
THE PRESIDENCY PROBLEM
Special Counsel Robert Mueller, the Southern District of New York ands the State of New York are closing in on President Trump, et al, and this is going to get ugly. So far, the Street has ignored the issue. Bad news for Trump may not adversely impact stock prices, good news would jettison them, since it raises the odds that Trump would be re-elected in 2020.
There are other issues that can crush the market (debt, fiscal crisis, depression), but extended dysfunction in the highest office in our country has the potential for immeasurable damage to stock prices.
Investors must be prepared for the possibility of this happening. If it doesn’t play out that way, be very grateful.
Investor’s first read.com
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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.