Market Commentary

Weekly commentary providing analysis with an outlook for the equity market.

June 19, 2019

Scott Wren, Senior Global Equity Strategist

Buckle Your Seat Belt

Key takeaways

  • With the Federal Reserve (Fed) meeting this week and the G-20 meeting next week, investors will be on heightened alert and focused on every comment and headline.
  • We look for volatility to pick up as these two events have the potential to fuel meaningful day-to-day stock market moves.

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Is the stock market pricing in an interest rate cut by the Fed at some point this year? How about more than one cut, or even three? What about one this week? We know the federal funds futures contracts are currently pricing in a nearly 60% chance of three cuts by January 2020. But, then again, it wasn’t so long ago that the same futures market was pricing in three or four hikes this year and look where expectations are now. So you need to take the indications given by these thinly traded futures contracts with a grain of salt.

In this piece last week, we argued that the market was simply looking for reassurance from Fed Chair Jay Powell that the U.S. central bank was paying attention and would move to cut rates if economic conditions deteriorated further as a result of heightened trade tensions. That is exactly what investors got when Powell stated the Fed would “act as appropriate to sustain the expansion.”

Now comes at least a minor day of reckoning. Minor because the market is pricing in only slightly more than 20% chance of a rate cut this week. What investors will be watching is the language in the post-meeting statement, the dot plot, and the Fed chair’s comments at the press conference. We will find out how tied the market is to a cut if the Fed only holds the “reassurance” line rather than going further and hinting that cuts will take place.

And don’t forget about next week’s meeting of leaders from the 20 largest economies in the world (G-20) in Osaka, Japan. Will President Xi and President Trump sit down and talk? Nothing official is scheduled at this time, but it would not be a surprise if a meeting was announced. Will a handshake and “happy talk” satisfy the market’s desire for trade negotiation progress? Or will something more serious need to take place? We certainly do not expect a deal to be negotiated over the G-20 meeting weekend. But, then again, the stock market probably doesn’t need a negotiated deal right now to feel better.

The bottom line is the market is going to be very sensitive to any statements from the Fed, to the Fed chair’s remarks to the press, and to any headlines coming into and out of the G-20. Statements of reassurance from the Fed that it will act as needed should help the market, but a less dovish tone will likely take some wind out of the stock market’s sails. Similar sensitivities will surround the G-20. Should the U.S. and Chinese presidents meet on the sidelines and the resulting comments are positive, or even better, if the next round of scheduled tariffs are delayed as negotiations continue, the market should retain its recent bid. But if the two world leaders leave the possibility of further talks uncertain, stocks are likely to take a hit.

In our opinion, modest growth and modest inflation should be good for economically sensitive stocks, such as those in the Information Technology, Consumer Discretionary, Industrials, Financials, and Energy sectors. Our outlook continues to call for a trade deal, although the time frame is likely further out than initially anticipated.

But, near term, buckle your seat belt and get ready for near-term volatility over the next two weeks.

Risk Considerations

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors.

Sector investing can be more volatile than investments that are broadly diversified over numerous sectors of the economy and will increase a portfolio’s vulnerability to any single economic, political, or regulatory development affecting the sector. This can result in greater price volatility. Risks associated with the Consumer Discretionary sector include, among others, apparel price deflation due to low-cost entries, high inventory levels and pressure from e-commerce players; reduction in traditional advertising dollars, increasing household debt levels that could limit consumer appetite for discretionary purchases, declining consumer acceptance of new product introductions, and geopolitical uncertainty that could affect consumer sentiment. The Energy sector may be adversely affected by changes in worldwide energy prices, exploration, production spending, government regulation, and changes in exchange rates, depletion of natural resources, and risks that arise from extreme weather conditions. Investing in the Financial services companies will subject a investment to adverse economic or regulatory occurrences affecting the sector. There is increased risk investing in the Industrials sector. The industries within the sector can be significantly affected by general market and economic conditions, competition, technological innovation, legislation and government regulations, among other things, all of which can significantly affect a portfolio’s performance. Risks associated with the Technology sector include increased competition from domestic and international companies, unexpected changes in demand, regulatory actions, technical problems with key products, and the departure of key members of management. Technology and Internet-related stocks smaller, less-seasoned companies, tend to be more volatile than the overall market.

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