INSUBCONTINENT EXCLUSIVE:
By Vildana Hajric and Elena PopinaTwo things keep investors awake at night these days
One is wondering how worried to be about manufacturing
The other, a nagging concern that Jerome Powell has better insights into the economy than they do.
Hop on Twitter and you see it, people
lambasting the Federal Reserve chairman for even considering stimulus when 224,000 jobs were just added to payrolls, home sales are bouncing
back and stocks sit at records
And yet in congressional testimony this week, Powell seemed more committed than ever to cutting rates
If you own stocks, you’re partly happy, partly scared.
The S-P 500 closed above 3,000 for the first time“If you just took somebody from
outer space who had read every economics book and showed them the data of unemployment and consumer confidence, they’d assume the economy
is on fire,” said Peter Mallouk, president of Creative Planning, a wealth-management firm with about $42.5 billion in assets under
“People feel like he knows something that everybody else doesn’t.”
Maybe it’s a little rich to question Powell’s logic a few
months after demanding he act to halt losses
But consistency is often in short supply when investors get anxious
Thanks to Fed doves, the dark days of December have been forgotten, with the obsession over rate cuts replaced by an obsession over what
they’re intended to cure.
It was a week of conflicting emotions
Headlines trumpeted the S-P 500 powering past 3,000, but the wire-to-wire gain wasn’t even 1%
While nothing to complain about, the advance was the smallest for any pre-earnings week in three quarters.
Into that mix comes the quarterly
parade of corporate reports, set to begin in earnest next week
And while early indications are notoriously unreliable when it comes to earnings season, right now they are instilling little
confidence.
Profits are expected to drop about 3% from last year, making this season “the worst of times,” according to Bloomberg
Intelligence analyst Gina Martin Adams
Eight of 11 sectors are forecast to post declines in per-share earnings growth, with analysts and companies cutting second-quarter views
“to the bone,” she said.
Early reports from companies with exposure to multiple sectors have been worrisome
Nuts and bolts supplier Fastenal Co
plunged after disappointing the market
So did peer MSC Industrial Direct Co., which fell after earnings trailed estimates
BASF SE, whose plastics and pesticides are found in everything from cars to crops to computer chips, said the trade war threatened to cut
its profits by 30% this year.
“They were talking about tariffs and margins and I think that’s going to be a characteristic of the
reporting season,” said Charlie Smith, founding partner and chief investment officer at Fort Pitt Capital Group in Pittsburgh
“Markets are doing their happy dance over the fact that the Fed’s going to cut
But I think there’s going to be some choppiness from weak earnings.”
Other all-purpose industries are showing weakness, too
Daimler AG, the world’s biggest producer of luxury cars, sees earnings falling “significantly.” Illumina Inc., a medical technology
firm, lowered its expectations for the year
cut its second quarter expectations, saying freight hasn’t seen typical seasonal improvements due to trade, industrial production and
weather.
The ratio of industrial companies to the S-P 500 has been going down
Transport stocks, in particular -- with their reputation for
economic prescience -- are showing weakness, with Citigroup, Deutsche Bank and Credit Suisse all cutting projections on trucks this week
“Broad volume indicators suggest demand remains soft, as shippers are slowing capital deployment given elevated uncertainty in global
trade,” wrote Citigroup strategists led by Christian Wetherbee.
Even if you don’t think any individual quarter moves the needle, you
can’t feel great about the larger trend in profit estimates, where analysts have been slashing longer-term views for the better part of a
They now see the S-P’s per-share earnings at $165.60 in 2019 and $183.00 in 2020
Both are $10 lower than in November.
Lost Illusions“There are a lot more risks underlying this market than the tape would imply,” wrote
Tom Essaye, a former Merrill Lynch trader who founded “The Sevens Report” newsletter
“If global economic data does not stabilize, or earnings estimates fall further, then that will eventually outweigh the dovishness.”
The
Though phones connecting the U.S
and China are ringing again, the fallout lingers
Chinese export growth slowed last month and imports shrank more than expected
Manufacturing everywhere is slowing
factory activity posted its third monthly decline and dropped to the lowest level since October 2016.
A reasonable response to the
negativity is: who cares? The S-P 500 is now up 20% on the year, it closed Friday at a record, and even bond yields perking up a bit
But apathy doesn’t describe investor behavior
A recent Bank of America survey found its clients are the most bearish since the 2008 financial crisis, with trade and recession concerns
driving much of the pessimism
Average cash balances soared, according to the bank, marking the biggest jump in cash since the debt ceiling crisis in 2011.
People are
getting defensive at UBS Group AG, according to its head of wealth management, Jason Chandler
“Clients are being a little bit more conservative and they’re holding more cash,” Chandler told Bloomberg TV
“U.S.-based clients are holding roughly 25% of their holdings in cash, and it’s less about a market pullback where they’re going to
invest -- it’s just being comfortable to go to sleep at night.”
Of the $28.7 billion yanked from global equity mutual and
exchange-traded funds in the week ended July 2, more than $25 billion fled U.S
products, data compiled by Investment Company Institute show
Those outflows from American active and passive funds were the third-biggest since 2013.
Bulls note it’s hard to be pessimistic looking at
groups like tech, where Amazon.com’s value just hit $1 trillion, while the Fang group comprising it, Facebook, Alphabet and Netflix gained
for 23 out of 26 sessions, something it’s never done before
And look at the strong June jobs report, the dwindling jobless claims, and inflation data coming in firmer than expected.
And yet, those are
the same bulls betting on a quarter-point reduction in interest rates at the end of this month
Following Powell’s testimony to Congress this week, traders have priced in almost three quarters of a point of easing by the end of the
year.
For Peter Cecchini, the global chief market strategist at Cantor Fitzgerald, it’s a little confusing.
“A look at history should be
creating considerably more dissonance for market participants than it is right now,” he wrote in a note this week
“Late cycle cuts, no matter how masterful any Fed maestro might be, tend to be followed by recession within several months
Risk assets tend not to perform well during such periods.”
