Rate Cut Incoming
Equities start the day lower as July comes to an end. Can you believe that? July is ending. The summers die one by one, how soon they fly on and on (as a father of a boy I’ve never made it thru this song without shedding a tear). At least this July is ending on a high note, as of the open the S&P was +2.8% MTD and 20.5% YTD. Incredible right? +20% YTD when it seemed like 2019 would be tough on the market. A trade war, tariffs, slowing global growth, slowing earnings growth, the list goes on and on. But that’s just what markets do, they climb that wall of worry. Speaking of a wall of worry, we have a Fed meeting on Wednesday and the big questions is “how much will they cut rates?” The market has priced in 25bps and I think that’s right, especially given all the commentary leading up to their blackout period. Is that priced into the market? I think 25bps is, 50 likely is not. Is this a “sell the news event”? I’m not sure to be honest but a great many people think it is so the contrarian in me has his ears perked up. My friends at Strategas looked at the performance of the S&P500 between the first rate cut (going to happen on Wed) and the next rate HIKE (who knows) and what they found was pretty darn good. There’s a couple of time frames where stocks fell but on average the index gained 20% in the interim period. Again, anything can and does happen in markets, all we are trying to do it make high probability decisions. NO ONE KNOWS what the future holds but in this specific instance the market has reacted favorably to the first cut (especially if a recession was not imminent).
After the open it turned into a “sell the big winners” kind of day. AMZN, FB, PYPL, ADSK, ADBE, lots of high flyers were cashed in close to month end. It happens, in fact the market was weak most of the session. If you’re gonna square up your risk before a Fed meeting you’re going to do it a couple days out. I would bet Tuesday and the first half of Wednesday are super quiet. Hey how about this factoid: NASA was signed into existence on this day (July 29) 1958 by President Eisenhower. 11 years later they would land a man on the Moon. Let’s also remember that humanity’s first powered flight was in 1903, so it took 66 years from powered flight to landing on the Moon. What an incredible feat that is, are you kidding me? How can you not be relentlessly optimistic about the future? Sure, I’ll grant you that there’s things to worry about in life but think of all the things that happened in the 20th Century and look how far we’ve come. Incredible, I can’t wait to see what happens the rest of this century. Or at least while I’m here, even though I ate a Big Mac on Sunday and probably took a few days off my life. Still excited!! (I’ve been re-watching this on HBO, it’s so darn good)
We spent over half the day in a 3 pt range so let’s wrap this up and go outside. 50% of the S&P has reported and I’ll let my friend Urban Carmel update you on the results so far: “Sales at a new ATH +4.3% YoY, EPS (GAAP) at new ATH: +8.7% YoY, Margins compressed a bit 11.3% vs 11.6% a year ago”. Guys, earnings are hanging in there, the worst case scenario of an “earnings recession” is rapidly fading. 2% GDP growth, earnings chugging along, unemployment still low, rates about to be cut, the macro picture is ok in the US (for now, that can always change). That being said, we are heading into a seasonally weak part of the calendar so a pullback is entirely possible (especially given that we are up 20%). For now we keep on keeping on knowing that if that pullback does come, its just part of how markets work. Final Score: Dow +0.1%, S&P500 -0.16%, Nasdaq -0.4%, Rus2k -0.6%
- It’s definitely a “winner take all” stock market but that’s not necessarily bad news: “One revelation might be that active managers should consider focusing less on being stock pickers, and more on being “stock-unpickers” -- in other words, avoiding the dogs. Identifying the characteristics of those 37,195 long-term money-losers -- what quantitative characteristics do they share that could be screened out -- might be useful.”
- 1 million people watched the Fortnite World Cup this weekend, let that sink in: “As the following chart illustrates, you could win the Tour de France, the Hawaii Ironman, the New York Marathon and the Masters Tournament in Augusta and still walk (or limp) away a poorer person than the world’s best Fortnite player”
- Gotta read Tim Duy before the Fed meeting: “I have said this before, but I think it is worth repeating: Do not bet against the American consumer in the absence of widespread job losses. With that in mind, note that initial unemployment claims continue to move sideways at very low levels. We have yet to see the upturn in claims consistent with even sharply slowing job growth let alone steep declines in the number of jobs.”
- Dear Fixed Income PMs….we need you: “In my opinion, there has never been a time where active management in bonds has been more sensible. Risk management is going to be the name of the game in the coming 20 years as investors wrangle with rising interest rate risk. Holding an index fund of bonds or plain vanilla exposure to something like a bond aggregate just isn’t going to cut it”.
- Really only one month left for peak Yacht Rock! Get on board!! “I remember watching the Grammys (in 1981) the year Christopher Cross won everything and thinking, ‘This is grandma music,’” said Kevin Stapleford, vice president of programming for Live X Live, which launched its yacht-rock station in 2013. “I hated him at the time, but I have a lot of respect for him now. The music is impeccably produced, and those songs are beautiful songs.”
Did you know you can open a bottle of beer with a piece of paper? I had no idea
Have a good night