- On June 10, 2019
- commentary, economics, Economy, in the news, investment, Investments, market, market update, Stock Market, stocks, Wall Street
Cornerstone’s Week on Wall Street
Highlights for the week:
- • Stocks experienced their best week of the year just one week after posting their worst weekly results
- • Dovish comments from Fed Chairman Jerome Powell powered markets higher
- • The 75k Nonfarm Payrolls report on expectations of 180k increases the odds of an interest rate cut near-term
Stocks were clearly in rally mode last week, as the all major U.S. indexes posted strong gains. The Dow Jones Industrial Average led the way, rallying 4.8%, followed by the S&P 500 up 4.5% and the Nasdaq up 3.9%. International and Emerging market stocks were also up but to less of a degree. From a sector perspective, Materials were the clear winner, up a whopping 9.2% for the week, followed by Tech up 6.0% and Consumer Staples up 5.3%. Bond yields headed much lower, with the interest rate on the benchmark 10-Year U.S. Treasury closing the week at 2.08%, the lowest reading since the fall of 2017. There continues to be a clear divergence between the equity and fixed income markets, as bonds are pricing in slower growth and inflation expectations, while equity markets cheer an accommodative Fed.
Speaking of the Fed, last week was a busy week with 13 speeches by various Governors, highlighted with Chairman Powell’s speech on Tuesday which sparked the equity market rally. His comments were clearly dovish and signaled to equity market investors that the Fed has their back. “We are closely monitoring the implications of these (trade) developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion…” He went on to say “The next time policy rates hit the ELB (effective lower bound or 0)—and there will be a next time—it will not be a surprise.” In effect, the Fed is now prepping the market for the Fed funds rate to ultimately go back to 0 when the cycle slows and also hinted at additional Quantitative Easing. “When policy rates reached the ELB during the crisis, central banks resorted to what were then new, untested tools to pursue their mandated goals (ie Quantitative easing). These tools are no longer new, but their efficacy, costs, and risks remain less well understood than the traditional approaches to central banking. My FOMC colleagues and I are
committed to explaining why the use of these tools in the wake of the crisis was a prudent and effective approach to pursuing our congressional mandate and why tools like these are likely to be needed again.”
In addition to stock markets climbing higher, the Fed Funds futures market, which is a prediction on the future direction of interest rates priced in 3 cuts in 2019, with the first to come in July. As of this morning, the market is pricing in an 83% chance of the first cut happening at or before the Fed’s July meeting, up from below 20%, just last month. This is a massive shift in thinking from only a few weeks ago.
While equity markets are taking Fed comments as bullish and are treating “bad news as good news”, we think investors would be wise to resist the urge to throw caution to the wind and go “all in” on stocks. Historically the Fed does not cut rates because the economy is doing well and stocks are near all-time highs. Cuts happen when economic conditions worsen and typically after stock markets sell
off sharply. The risk is that the market gets out over its skis in regard to rate cuts, opening up the possibility for disappointment if the Fed does not act as quickly and as aggressively as what is priced. Conversely, the economic data could continue to worsen which strengthens the argument for a rate cut, but may ultimately be detrimental for stocks.
It’s a relatively quiet week from a data perspective this week. Earnings season is nearly complete, as 496 out of 500 S&P 500 companies reported results for the first quarter. Total sales growth increased by 4.4% year-over-year, while total earnings grew 1.5%, coming in better than expected. Eight of eleven sectors showed positive sales and earnings growth, while Information Technology, Materials and Energy sectors showed declines on both the top and bottom line. On the economic calendar, we will get an update on inflation, business confidence and retail sales toward the end of the week.
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