Get ready for a step back in stocks

Two steps forward, one step back, it’s the nature of things. Unfortunately, stock markets are susceptible to this pattern as well. As such, investors should be gearing up for a bit of downside in the near future.   That should come as no surprise. I like to remind readers that equity investors can expect at least one to three selloffs per year. Some of those declines can be quite scary and seemingly come out of nowhere. That’s the price of doing business in the stock market. Traders know this. They are paid to anticipate these moves. They make their money during times like that. They will buy stocks at giveaway prices from panicky investors like you and I, who typically sell at the lows and buy at the tops. My hope is that if I can prepare you to expect these minor blips in the market beforehand, you won’t become a victim of your own fear. Take the present level of the S&P 500 Index, which hit 3,000. That is something I predicted would happen a few weeks ago and right now, if you had stayed invested, you would be quite pleased with your performance. The 3,000 level on the S&P 500 is a nice round number and humans, for whatever the reason, are drawn to nice round numbers. That level also registered as a new historic high (actually, the index hit 3,018 for a moment, before backing off). But for some, if you put those two events together, some might assume that we may have hit an interim top in the markets. That’s way too easy. If I...

Lower interest rates equal higher stock prices

The math is simple. As long as the Federal Reserve Bank is neutral to positive on lowering interest rates, investors who want any kind of return are forced into the stock market. Until that changes, equities are in the buy zone. “But, but, but,” moaned several readers, who called or emailed me from blue states, “What about Trump, and the Chinese and the Iranians and earnings season and everything else?” That doesn’t matter, in my opinion, over the next few months, or until stocks become so over-extended that the markets fall upon their own weight. Think of a tree that grows so tall and its limbs and leaves so full that its roots can’t support it. Until then, enjoy the ride. Unless you have been living under a rock (and some have), you should know by now that America’s outlook on things financial has become extremely polarized. Those in the Trump camp believe we are on the verge of the second coming of the Lord (if only we would all give the president a chance.) Those on the other side are convinced that Trump represents (as the Iranian leaders argue) the “Great Satan.” The Trump camp of investors needs little encouragement when I paint a positive picture of what’s to come in the stock market, so let’s focus on calming the fears of the remaining equity investors. My advice is not to be swayed by your wall of worry. I do not mean to discount or make light of all the negatives that we hear and encounter time and time again. They are definitely out there. But none of...

Will the second half of the year be as good as the first half for the markets?

The S&P 500 Index finished up 18% for the six months ending June 30th. That was the best first half since 1997. Historically, that kind of return is three times the gains investors can normally expect from the market in an average year. The chance of a repeat performance in the next six months is, at best, remote. That doesn’t necessarily mean this is as good as it gets for stock investors. My near-term target for the S&P 500 Index is somewhere around 3,050, which is a further 4% gain from here. From my vantage point, as long as interest rates continue to decline and the Fed stays at least neutral, we go higher. For the time being, the China trade tariff worries are off the table. As I predicted last week before the G-20 meeting, Donald Trump adhered to his “speak loudly, but carry a little stick” foreign policy. He relented on a number of issues, including holding off on any further tariffs on China, at least for the time being. While the markets rallied on Monday as a result, they quickly gave back their gains since investors are beginning to learn that not everything that our president says will necessarily be accurate, or when it is, his statements are almost always an exaggeration of reality. The Fed, on the other hand, is a different kettle of fish. You might ask why the markets are continuing to rise when economic growth here and abroad continues to slow. First, recognize that the economy and the stock market are two different entities. What may not be good for Main Street...

G-20 weighs on stocks

It wouldn’t be a normal weekend in the financial markets without something to worry about. This weekend, it is the meeting of the two presidents, Trump and Xi, in Japan with $350 billion in new tariffs hanging on the outcome. What are the odds that they clinch a deal? Not great, in my opinion. That doesn’t necessarily mean that we need to brace for a worldwide economy-killing deluge of massive tariffs and counter-tariffs either. There is too much at stake for Donald Trump and China knows it. Instead, I expect we will get a classic Trumpian foreign policy “speak loudly and carry a little stick” maneuver. Robert Lighthizer, our U.S. Trade Representative already telegraphed just such an outcome earlier in the week. After a conference call on Monday with his Chinese counterpart, Vice premier Liu He, several unnamed trade officials indicated that “the U.S. is willing to suspend the next round of tariffs on an additional $300 billion of Chinese imports while Beijing and Washington prepare to resume trade negotiations.” So sometime over the weekend, I expect one of those ‘my great friend, Xi, and I agreed to further talks, so I will delay implementing these new tariffs,’ kind of statements from the president. Of course, there will be the usual bluster about how much tariffs will hurt China and how we are making so much money on existing tariffs already, yada, yada, yada. If my expectations are fulfilled, the markets should once again breathe a great sigh of relief. Stocks will likely rally. The economy will probably continue to slow. I expect businesses will continue to postpone investing...

Stocks should move higher from here

It was a good week for investors. The S&P 500 Index hit an all-time high. The Fed indicated that they might cut interest rates sometime soon, and the President is once again optimistic about a China trade agreement. That’s a heady cocktail that could see markets gain another 3-5% over the next few weeks. Of course, the critical caveat to my forecast remains President Trump’s next tweet on the progress of a trade deal with China. As you know, with such a big “if” on the table, making future forecasts with even a modicum of certainty is impossible. In last week’s column, I enumerated all the scenarios that could play out, but it really comes down to how much faith an individual has in the president’s ability to pull-off a deal with China. And while a successful agreement would definitely be good for the economy over the long term, I am not so sure it would be beneficial for the stock market. My concern rests upon the Fed’s reaction (or lack thereof) if an agreement is put in place. Chair of our Federal Reserve Jerome Powell has hinted that cutting interest rates would largely depend on what happens next on the trade front. That has sent the stock market to new highs. The Fed reasons that additional tariffs of the size contemplated by Trump would impact our economy by over one half of one percent. That would be on top of a U.S. economy that is already slowing, thanks to the existing level of tariffs, and the rhetoric of even more actions if things don’t go the president’s way....

Markets expect Fed to cut rates

Investors can credit the Fed once again for the market’s revival thus far in June. The buying is fueled by expectations of three rate cuts by no later than December. Is that wishful thinking? While only 23% of investors expect a rate cut next week when the Fed meets, 83% do expect a cut in July. The odds of another cut in September are now at 63.8%, with a third cut in December, which is expected by over half of market participants. Given that the Fed’s job description is to keep inflation under control, while supporting robust employment, one or the other of those variables will need to change in order for the Fed to cut rates. The inflation rate is still below the Fed’s stated targets, so that shouldn’t be the issue, which leaves jobs as the area of concern for the Central Bank. Over the last few weeks, job creation has slowed down, but so far the data does not indicate the unemployment rate is set to skyrocket. It is true that warning signs are flashing for economic growth both here and abroad, but the U.S. is still expected to grow by 2.2-2.5% this year. Most economist models indicate a further slowing to slightly under 2% for the U.S. economy in 2020, but that still results in an acceptable performance for an economy that is on its 10th year of expansion. I guess the real issue that makes forecasting by the Fed, investors, and myself so difficult is the ongoing trade and tariff threats that will most likely decide the fate of the global economy. Three rate...