Street Betting on Fed Rate Cut designed to Head Off Recession

INVESTOR’S first – Daily edge before the open
DJIA: 26,258
S&P 500: 2,867
Nasdaq Comp.:7,828
Russell 2000:1,556
Tuesday, April 2
, 2019   7:03  a.m.
The Street jumped in to buy aggressively yesterday, because China’s economy is pulling out of the worst slump in 28 years.
That’s a crock because the U.S. economy is still slipping.
I think the Street suspects the Fed will cut its fed funds rate in the near future, desperate to head off a recession in an election year.
As I explained last week,
I believe the Fed will lower its fed funds rate this summer (May 31 or June 19) if the economy continues to slip.
The Fed wants to achieve  a soft landing, and  reverse the current economic weakness before it reaches a recession, and the best way to achieve that is  lowering the fed funds rate.
Friday, Trump’s economic adviser, Larry Kudlow, urged the Fed to cut its fed funds rate by 50 basis points. This suggests the White House is very concerned about a recession in 2020.
However, 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 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%.
If the market averages reach new highs, that forecast will be wrong, but won’t change my belief a bear market is imminent.
New DJIA support is: 26,167, S&P 500:2,857 and Nasdaq Comp: 7,786.
      The market averages broke out above conventional resistance levels Friday and followed through strongly yesterday.
      Resistance now is DJIA: 26,497; S&P 500: 2,880; Nasdaq Comp.:7,896.
EARNINGS: For 2019, FactSet expects a gain of 3.7%. Currently, it tracks  2019 earnings gains/losses at Q1: -3.9%, Q2: +0.1%, Q3: +1.7%, and Q4: +8.3%;
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, however he 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.
February Retail Sales  declined 0.2%, though January’s sales were revised up sharply.  PMI manufacturing Index for March was flat.  Business inventoies rose at a faster pace than sales, a potential red flag. The ISM Manufacturing Index came in at the high end of projections. Construction Spendingg jumped 1.0%v in February.
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%.
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. ………………………………………………………………….
Fed Damned if they did and damned if they 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.
George Brooks
Investor’s first
A Game-On Analysis, LLC publication
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.











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