Fresh air, and things seem so clear Fresh air, and things seem so clear\images\insights\article\meadow-rocky-mountain-small.jpg January 21 2020 July 26 2019

Fresh air, and things seem so clear

A visit to Colorado helps Linda make sense of the Fed and the markets.
Published July 26 2019
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This week took me to breathtaking Vail and a regional meeting with top advisors. I shared my current research on the election season and likely impacts on the market—too much fun! (Look for a special weekly next Tuesday that will discuss this.) Concerning the apparent stalemate in negotiations with China, an advisor shared with me that he lived and worked there some decades ago, and saw firsthand their insistence on learning ALL of the company’s secrets. This gentleman doesn’t believe a real deal with China is possible. Another advisor from this very thoughtful group, responding to my comment that we remain in a long-term secular bull market, suggests that charting shows the current secular bull actually began in 1974! (And then me and the Mister, who was hiding in my luggage, did some sightseeing ... Colorado can work wonders for improving one’s mood!) Investors came into this earnings season with a lot of anxiety, but the numbers have pleasantly surprised so far. According to Bloomberg, 78% of the 135 S&P 500 companies that have reported beat on earnings-per-share by an average of 4.8%; 63% beat on revenues by almost 1% on average. This is in line with recent quarters. The most important macro sectors in any given reporting period are banks, credit cards, cap goods and semis, and J.P. Morgan says all four have been much more positive than negative this season. The increasingly accepted view appears to be that profits will be flat for the year, neither weak enough to foreshadow recession or strong enough to buoy investor optimism. The Conference Board says just 31% of households anticipate higher stock prices six months from now. Households, perhaps some mountain air is in order?

Consumer confidence could be telling. Since reaching an expansion high last October, it has steadily fallen and sits near a 2-year low. Historically when this gauge erodes from extreme levels and falls below 110 (it’s at 121.5 now), defensive leadership tends to establish control, with defensive sectors outperforming cyclical sectors by about 34% per annum, Ned Davis Research says. And once consumer confidence peaks, it has taken a median of 25 months to reach a bottom, with economic recessions starting much sooner—about 13 months on average although there is a wide range of lead times (five to 21 months). While Fed policymakers continue to hew to their longstanding “data-dependent” narrative, they clearly are looking beyond just the data to geopolitical developments, i.e., the U.S.-China standoff, mounting Middle East tensions, a possible no-deal Brexit under new British Prime Minister Boris Johnson, among them. The Fed has no inflation constraint now. Since 1971, after the Fed made its initial cut during a period in which leading indicators are still positive (as is the case now), stocks rose 100% of the time three, six, nine and 12 months out, with a median 9-month gain of 18%.

Most rate cuts are being done by countries harmed by the trade war, with some central banks pushing rates near or even below zero and weighing the use of unconventional policies. Say I'm right ... if and when the Fed and the European Central Bank (ECB) deliver their “insurance cuts,” the effect could compound globally and stage a faster recovery. The ECB this week hinted that after a September insurance cut, rates may be on hold at least until mid-2020. Might the Fed do the same? The big three—Chair Powell, Vice Chair Clarida and Bank of New York Fed President Williams—have been advocating for a new “reaction function’’ that recommends acting before risks arise, but UBS says investors have been left to guess exactly what risk indicators merit reactivity. A 50 basis-cut could correct the imbalance between a 5-year Treasury yield trading below the real fed funds rate, potentially minimizing the push for currency intervention. But if the Fed disappoints, Strategas Research thinks currency intervention aimed at weakening the dollar may be inevitable. In trimming its global outlook, which actually raised the 2019 GDP growth forecast for the U.S. from 2.3% to 2.6% but lowered it for China and trade-reliant economies, the International Monetary Fund welcomed more monetary accommodation but said countries also need to adopt sound trade polices to reduce downside risks. Do you think anyone in the U.S. or China was listening?


  • Just a soft patch At 2.1% annualized, the government’s first take on second-quarter GDP came in above consensus, bolstered by stronger-than-expected consumer spending. Business investment was a drag, but core capital goods jumped 1.9% in June, suggesting this metric could be in the process of rebounding as companies moved to fill pent-up demand for new production equipment. The Philly Fed’s monthly survey showed economic activity improving in 46 states, a high for the year, as the expansion accelerated during the month.
  • Most of our economy is in services While Markit’s initial gauge of July manufacturing activity stagnated, coming in at its lowest reading in almost 10 years, services activity rose to a 3-month high on new orders and "resilient consumer spending.’’ The Richmond Fed’s monthly survey was similar, with manufacturing in a funk and services on an upswing.
  • Housing’s not getting worse … New home sales rebounded 7% in June, its first increase in three months. Year-over-year (y/y), sales were up 4.5% while the median sale price was up only 1%, indicative of moderating price trends across various gauges.


  • … but housing’s not getting better, either Existing sales fell again in June and are now down more than 2% on a y/y basis. Inventories remain an issue, as available supply substantially lags demand and is failing to keep up with population/household growth, particularly among entry-level home buyers.
  • More than a soft patch overseas Eurozone data continues to be worrisome. There’s been a broad-based slowdown in future demand for business loans, consumer confidence remains suppressed and the manufacturing PMI is its lowest since December 2012. German IFO business sentiment is in free fall and, across the globe, Japan’s manufacturing PMI has been in contraction territory for three straight months.
  • Trade’s the biggest headwind Exports and imports fell in June by the most in 2.5 years, causing trade weakness to offset recent improvements in retail sales and core capital goods.

What else

What’s driving gold? Rate-cut expectations are correlating with the price of gold, a sign the market may be seeking it as a hedge against the protracted U.S.-China trade talks, the prospect of a no-deal Brexit and flaring tensions in the Gulf. In my research, many sources are predicting a breakout in the price of gold. It’s consensus, I’m just saying.

A Mueller put? Following the special counsel’s testimony, betting odds of President Trump being impeached fell to 22% while odds of his winning re-election rose to 49%, a cycle high.

2-Mile High City As we explored one of the most beautiful states in the land, the Mister and I stopped in Leadville, near Aspen. At more than 10,152 feet, it is nearly two miles high, the highest of any incorporated city in the U.S. Originally called Silver City, it was the last place Doc Holliday was a law man, the first proposed capital of Colorado and is surrounded by 14,000-foot peaks.

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Tags Equity . Markets/Economy . Monetary Policy .

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices.

Gross Domestic Product (GDP) is a broad measure of the economy that measures the retail value of goods and services produced in a country.

Ifo Business Climate Index is a gauge of activity and expectations among German manufacturers

S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designated to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.

The Markit PMI is a gauge of manufacturing activity in a country.

Federated Equity Management Company of Pennsylvania