Markets Take A Breather
Unusual action in markets is that nothing is happening. S&P 500 - SPX has closed within 2% of 3,000 for 12 straight sessions. It makes sense for markets to pause because they are heading into a news laden month. In October, there is another Fed meeting, Q3 earnings season, the trade meetings between America and China, and another Democratic primary debate. The primary is being shook up as the latest Iowa caucus poll has Warren up by 2 points over Biden.
An average of the recent national polls still has Biden up by 11.1 points. That 5th debate in November might shrink the number of candidates down to 7. Which would increase the likelihood of the top candidates going head to head which could alter the polls.
Specifically, S&P 500 fell 1 basis point, Nasdaq fell 6 basis points, and Russell 2000 fell 10 basis points. VIX fell 0.41 to 14.91. It’s actually a little higher than expected with the market so close to its record high and such few large declines recently. CNN fear and greed index rose 1 point to 59 which is greed. There is plenty of room for the market to fall if there is negative news on trade, weak economic data, or weak earnings.
First 5 Firms To Report See Estimates Fall
As you can see from the table below, the first 5 Q3 earnings reports haven’t been great as their estimates have all fallen. Worst was obviously FedEx which has seen its stock crater 14.15% in the past 3 trading days. Some macro investors are extrapolating the firm’s earnings report too far. I don’t think the economy is headed for disaster just because FedEx had a bad quarter and released weak guidance.
October 11th is considered to be the unofficial start of earnings season since it’s estimated to be the day Citigroup and Wells Fargo report earnings. This table will soon be filled with results. Bears are circling as they ready for an earnings recession, but I’m not expecting a disaster. There has been no evidence to suggest earnings falling off a cliff. This is a slowdown, not a recession.
Sectors & Treasury Action
Worst 2 sectors on Monday were healthcare and communication services which fell 0.61% and 0.4%. Healthcare could be hurt by Warren’s advancement in the polls. Best sectors were consumer staples and real estate/tech/consumer discretionary. Staples were up 0.24% and the 2nd group was up 0.23% each.
Treasuries continue to rally as they are regaining much of their losses earlier in the month. Recent action hasn’t been severe as the market appears to have found a happy medium. Plus, like stocks, treasuries are awaiting the news laden October. 10 year yield is at just 1.71% which puts it 19 basis points below its recent high and only 28 basis points above its 2019 low. This has flattened the curve, but also implies weak nominal growth. That’s debatably a negative. It depends how much importance you give to the yield curve.
The curve certainly isn’t suggesting the economy is in a recession. Only the perma bears see a recession as there is almost no data that suggests one. 2 year yield is at 1.68% which puts it 12 basis points below its recent high and 25 basis points above its 2019 low. Difference between the 2 yields is only 3 basis points. The curve is very flat. Because of the recent decline in short rates, there is now a 53.4% chance the Fed eases by the end of the year.
If the Fed cuts again this year, I think there’s a high chance the Fed cuts rates fewer times in 2020 since there could be a trade deal and a cyclical upturn. Plus, the Fed is running out of room to cut. You’d think a Fed that doesn’t want negative rates wouldn’t be cutting so much in a slowdown.
It’s very difficult to have perfect timing with rate cuts. If the economy fell into a recession in early 2020, everyone would claim the Fed didn’t cut enough. Hindsight is 20/20. You can only make decisions based on the current information. To me, the Fed should be close to ending this adjustment unless further negative data comes out.
Global Central Banks Cut
Compared to global markets, the Fed is relatively hawkish. To be fair, the Fed shouldn’t be as dovish as the ECB since Europe is in a deep manufacturing recession and had its composite PMI hit a 75 month low.
As you can see from the chart below, the global economy is getting a heavy dose of stimulus from central banks. It shows India, Iceland, Chile, Russia, Philippines, Australia, Serbia, Brazil, America, South Korea, South Africa, Mexico, Hong Kong, and Thailand have all cut rates. This is one of the potential catalysts for a global cyclical upturn in 2020.
India is about to see a stimulus from its recent tax cuts which means it might see an acceleration in GDP growth in 2020. Specifically, the country cut its corporate tax rate from 30% to 25.2%. Local companies are allowed to pay a 22% rate and manufacturing companies will pay a rate of 17.01%. China will probably boost global growth by less than it did in 2019. Maybe India will pick up the slack. The gap between Indian and Chinese GDP growth will increase in 2020.
Conclusion
U.S. markets are awaiting the trade meetings in early October and Q3 earnings season which starts in the middle of the month. I see a potential global recovery based on the monetary stimulus. India should drive global growth with its rate cuts, tax cuts, and strong demographics.
This is like if the Fed would have cut rates in 2017 and 2018 instead of hiked them. America really would have outperformed last year. This year, America has dealt with the headwinds of the trade war and relatively tight monetary policy. Remember, there is a lag between when interest rates are changed and when they effect the economy.
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