INVESTOR’S first read.com – Daily edge before the open
S&P 500: 2,979
Russell 2000: 1,562
Wednesday July 10, 2019 8:58 a.m.
Today, it’s all about Fed Chief Powell, who testifies before the House Financial Services Committee today.
The Street is hoping for a clue how the Fed will rule on cutting the Fed Funds rate July 31.
Expectations were running high for a cut until a better than expected Jobs report threatened move the Fed away from a cut which might be premature if the economy is getting a second wind.
Powell has been catching flack from President Trump for not cutting rates sooner. While Powell denied Trump’s pressure is influencing his decision, he and his directors have verbally rescued stocks on two occasions.
A Rate cut decision will come at the end of the month, and the market is up at this time, so I doubt he will say much to goose stocks higher.
The Fed must be careful here, its credibility is at risk after its reversal in January after a December rate cut.
Minor Support: DJIA:26,857; S&P 500:2,6747;Nasdaq Comp.:8,126
Minor Resistance: DJIA:26,907 ; S&P500:2,993;Nasdaq Comp.:8,173
Tuesday (July 9)
As long as the Street’s computer algorithms are programmed to buy at the market and on dips, the market will avoid a bear market.
At some point, the outlook for the economy and corporate earnings will become bleak so bleak these algos will have to be reprogrammed to adjust for risk by selling. Since many of these institutions key on the same indicators, they will all begin selling at the same time.
This selling pressure combined with a sudden absence of buying will take the market straight down 12% -16%.
That becomes the juncture where the Street will decide how bad things really are. If the economic outlook is worsening, the market will have to sell off enough to adjust for that, you then have a bear market – down 35% – 45%.
At its extreme, very few of the gutsiest investors will be buying, just like very few are selling now assured the institutions’ algos will not let a bear market happen.
At some point, some major institutions will break ranks and sell, setting off a stampede. There is no good reason for the S&P 500 to sell at 30 times earnings when a recession looms, corporate earnings are turning negative, debt at the individual, corporate and government level is too high, a Mid-East war possible, and uncertainty escalating about the ability of our government to address pressing problems.
Monday (July 8)
A better than expected jobs report Friday appears to have squashed the Street’s hopes for aggressive action by the Fed to cut interest rates.
So, the Street is back on the “bad news is good news, and good news is bad news” mentality. Jeeeeeeez !
There are other economic indicators and most have been pointing down, like manufacturing (here and abroad), a slump in the Leading Economic Indicator (LEI), encompassing 10 key economic areas, personal consumption expenditures, after-tax disposable personal income, retail sales, housing, and consumer confidence.
Regardless of the back and forth banter between the Federal Reserve Chair Powell and President Trump, the Fed is determined to head off a recession in 2020.
It will try to talk the economy out of recession or cut interest rates to do so.
The market is up 6% since Fed Chief Powell “hinted” that the Fed will cut rates and six months since the Fed abruptly reversed its policy from restraint to ease when signs of economic weakness flashed.
Interest rates have plunged dramatically in recent months, but the Street wants more, as if that would head off a recession – delay it, maybe, head it off no.
The market is some 30% – 40% overvalued, yet buyers press on as if nothing is wrong.
That is classic late-stage bull market behavior – THIS HAPPENS AT EVERY BULL MARKET TOP.
Friday (July 5)
The Street really doesn’t know what to do next. Recently, it has keyed on the prospect for the Fed reducing interest rates in an effort to head off a recession, which in my opinion has actually started in bits and pieces.
The prospect of a recession and lower Fed rates, triggered a stampede to lock in interest rates before they plunged. This massive buying of bonds ramped up their prices and consequently drove rates down sharply, the 10-year Treasury plunging to 2%.
This also triggered buying in stocks, especially higher yielding stocks, which doesn’t make much sense. If the Fed sees a recession, stocks will be adversely impacted if one actually develops.
The Street wants the party to go on forever, 10 years isn’t enough. This is classic late stage bull market behavior ensuring a bad ending when eventually savvy buyers exit and sellers enter, slowly at first, then increasing as reality sets in, ending in panic and a bear market bottom.
Can’t happen this time ? Don’t bet on it !
This time could be real ugly. There is little the Fed can do to stop a recession and bear market. Lower interest rates from already low levels won’t help much. Reviving QE will have limited impact. Congress already passed a monster tax cut.
This is what happens at bull market tops.
Tuesday (July 2)
The stock market has been hanging tough in face of numerous negatives, including political turmoil, war worries, tariff disruptions and a slump in corporate earnings.
The market has gotten a big lift from an abrupt reversal in Federal Reserve policy, hints of lower rates and administration hype.
So far, the Street has totally ignored the prospect of a recession, even though the Fed’s about face on interest rates indicates it is scared stiff a recession will hit starting this year and in 2020, a presidential election year
Three economic reports yesterday confirmed their fears.
June’s PMI (50.6) hit a 10-year low
June’s ISM (51.7) is still sliding since its peak a year ago.
Construction spend in May slid 0.8% below projections.
In my opinion, an S&P 500 price/earnings -ratio does not adequately discount the angst of a recession. Historically the Shiller P/E at 30.2 is higher than any bull market top except the dot-com bubble burst market in 2000, which led to 50% plunge in the S&P 500.
At some point, the Street will have to face reality. When it does, odds favor everyone will do it at the same time.
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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