Monday, July 8, 2019

The Problem That Feeds THE Problem

The President continues to say that if the Fed would cut interest rates the Dow would be at 30,000 and that the economy would rise "like a rocket"!

Well, here's what Bespoke Investment Group has to say about the fact that earnings revisions (spreads) heading into the present season are the second-worst in the past 3 years:
"The key trend to watch this earnings season will be how often the term ‘China’ or ‘tariffs’ comes up in quarterly conference calls. With increased uncertainty created by the on-again, off-again escalation of trade disputes between the US and its largest trading partners, we have seen a significant uptick in negative analyst commentary. Over the last four weeks, analysts have raised EPS forecasts for just 278 companies in the S&P 1500 and lowered EPS forecasts for 611. This works out to a net of negative 333 or more than 22% of the stocks in the index. To put this in perspective, there has only been one other quarter in the last three years where the net EPS revisions spread heading into earnings season was more negative than it is now."
Did you notice the references to concerns over Fed policy? Oh, that's right, there wasn't any! Ah but there was mention of what we herein have been saying is THE existential market risk for months, and months, now; which would be found in that first part in bold print!

That said, make no mistake, all the market focus for the moment is on the Fed; particularly Fed Chair Powell's testimony this Wednesday and Thursday. Any hint that the committee is hesitating on a July 31st rate cut will be met with a strong round of stock selling, you can bet on it!

But I wouldn't lose any sleep if I were you, for, alas, it's very clear that this particular Fed board does indeed lose sleep over the stock market. Thus, at least without consistently stronger data coming out between now and then, I see zero chance that the Fed doesn't cut its benchmark rate by a quarter-point. And, ironically, therein lies the problem that continues to feed THE problem.

I've maintained herein from the get-go that it'll be the stock market that ultimately ends the trade war; the stock market plunging, that is. As long as the President can continue to tweet self-congratulations for record stock prices, he'll not feel the least-bit pressed to put an end to the tariff regime that he created; despite the weak data coming from the industrial sector, the pleas from literally thousands of U.S. companies, and the prospects for a rough earnings season(s) to come. 

My concern is that the longer the market takes to deliver the much-needed message, the more macro deterioration the economy will suffer in the meantime. Therefore, if it takes too long, if, let's say, the Fed continues to prop stock prices up, we could find ourselves ultimately staring down the next recession, and a doozy of a bear market to go with it. That's not yet my base case, as our own macro assessment -- while a very far cry from the high scores of a year ago -- still reads expansion. 

I.e., there's still time for wisdom (i.e., some fundamentally-sound economic thinking) to prevail, but we're getting a little too close for (my) comfort...

We'll keep you posted....




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