Where we left off:
We left off last month saying “with the Fed behind the market, I expect that we keep melting upward to new highs.” And this is just what happened as the S&P broke the 3000 level. This happened as the Fed essentially “showed its hand” and the market liked what it saw. However stronger than expected economic data has slightly complicated issues.
Here’s what I’m focused on:
An accommodative Federal Reserve is still the most important driver of the rally in my opinion. Low rates continue to boost bottom lines of corporations while forcing savers into the stock market.
Earlier this month, Powell testified in his Monetary Policy Report to Congress that “crosscurrents have reemerged, creating greater uncertainty.” In addition to these dovish comments, NY Fed President John Williams made comments that the Fed should “act quickly” to lower rates during economic distress. He said “it’s better to take preventative measures than to wait for disaster to unfold.”
The expectation is for the Fed to cut rates at least a quarter point when they meet on July 30-31. If for some reason we don’t get a cut, I’d expect the markets to feel a jolt.
Late last month, Presidents Trump and Xi decided to hit pause on the trade war. With this the US agreed to ease up on Huawei. This renewed optimism gave markets a boost, helping move equities to new highs. And while the stock market has loved the ceasefire, it still seems clear that the trade war is far from over. So, be careful to temper your expectations while we wait for more certainty.
Debt Ceiling Deal:
A pressing issue in Congress is the need to agree on a debt ceiling deal. The US treasury could run out of money in September at a time when Congress is normally in recess. This gives them an incentive to get in front of the deadline to resolve the issue. There is usually drama around these events, so expect volatility to pick up a little. But I expect they will get it straightened out as they always have.
Iran issues just don’t seem to be going away, which is a tad worrisome. It seems like each of the past few newsletters we have referenced them, and the issues continue to escalate. The latest issue occurred July 7 when Iran said it was ramping up its uranium enrichment which resulted in breaking the limits outlined in the nuclear deal that the US abandoned last year. The market doesn’t seem to be too concerned with a military strike, but this issue feels too large to ignore at this point.
As we mentioned earlier, the S&P broke a significant psychological level of 3000 while the Dow broke 27,000. These are the levels I am watching as a reference point for a fair value based on all the news that is available at this point. If we fail to hold these levels over the next couple weeks, I’d expect these to serve as a major resistance level.
As the Fed has “shown its hand” and we are at a standstill with China, this earnings season is going to be the determining factor in where we go from here. Expectations are for the current earnings to slow. But all eyes are going to be on their growth projections. So far, just a few companies have reported with Citi, JP Morgan and Microsoft beating to the upside with Netflix and IBM missing to the downside.
Facebook’s Marcus testified on Capitol Hill in regard to their new cryptocurrency, Libra. In addition to this, Facebook also came to terms with regulators over their other privacy related issues as regulators approved a $5 billion fine. While this was the largest fine of its kind, many considered it just a slap on the wrist.
Botox maker, Allergan, was bought by Abbvie for $63 billion.
Popular workplace-messaging firm, Slack, went public adding to the hot IPO market.
Right now, the main focus is earnings season as we see what company forecasts are for the next few years. As we mention often, this current market expansion is the longest in modern history. And, it seems most everyone is waiting for this party to end. While this is cause for concern, it is also reason to be optimistic as a contrarian who thinks the herd is usually wrong.
At any rate, I expect volatility to pick up, but the market should remain in good shape. After all, US equities are still the best game in town. The Fed has proven they are committed to doing everything they can to extend the rally, but now it is time for US companies to pick up the ball and run with it.