Stocks and Fed Rate Cuts
Bull Market for Policy Uncertainty
Stocks have benefited recently from increasing hopes of a Fed rate cut, although investors probably won’t get one this week.
Stocks’ historical performance after initial Fed rate cuts has been mostly positive, but it has been greatly dependent on the business cycle.
We prefer to see the market stand on its own and take more direction from generally solid fundamentals of economic growth and corporate profits.
Bond Markets' Signal to Stocks
Policy uncertainty remains high, particularly around trade.
While it is good news that an agreement was reached with Mexico over the weekend to avoid those tariffs, a trade deal with China is unlikely until more economic pain is incurred by both China and the United States.
We have reduced our 2019 earnings estimates to acknowledge the increased risk of a prolonged trade conflict, though we remain above consensus estimates.
Earnings Season Takeaways
Worrisome signals from the bond market contributed to stocks’ first monthly decline of 2019.
While we expect rates to end the year solidly above current levels, until we get some good news on the trade front, rates are likely to remain stubbornly low.
If rates reverse higher as we expect, stocks may enjoy some tailwinds.
Deal or No Deal?
We consider first quarter earnings season a success based on the upside surprise and resilience of estimates for the rest of this year.
It appears an earnings recession has been averted and better earnings days lie ahead, though trade uncertainty is a huge wild card.
Our base case remains that we will get a trade deal with China early this summer and consensus expectations for S&P 500 earnings growth in 2019 of 3 – 4% may prove to be conservative.
Sell in May?
Escalating U.S.-China trade tensions caused stocks to sell off more than 2% last week.
Globally exposed sectors paced last week’s declines, namely materials, industrials, and technology.
The maximum peak-to-trough decline of less than 3% so far this year (as of May 10) is small by historical comparison.
Stocks Reach Record Highs
The May through October period has historically been the weakest six months for equities.
However, in recent years the six-month stretch has seen higher equity prices.
This year, with stocks up significantly from the December lows, we advise more caution than previous years.
The S&P 500’s new record high set last week ended a more than 7-month drought without one.
History tells us that new highs should be celebrated, not feared.
Even though the market may be due for a pullback, we think stocks will be higher at year end.
What's Priced In
U.S. stocks have rallied back near all-time highs in an impressive feat of momentum.
This momentum could fade as stocks grapple with overbought conditions and mixed signals.
Overall, we expect the S&P 500 to move higher after a period of consolidation.
We look at what’s priced into stocks following year-to-date strength to help gauge potential impact of surprises and disappointments.
When we look at what’s not priced in, we see several possible surprises that could propel the stock market to new highs.
Possible positive surprises include the stimulus boost from a potential China trade deal and better-than expected corporate profits in 2019.