(New York)

Don’t let the cooling of the trade war between the US and China fool you, the markets are not in a good position, at least that is the position of Bank of America. The bank thinks there won’t be a deal between Washington and Beijing until the US market feels real pain. They think the looming Q3 correction will be the stimulus that gets a deal done because Trump operates under a “no pain, no deal” paradigm. “The markets are likely to view the summit as a modest positive in the short run. But stepping back, we see several reasons for concern”, says Bank of America.

FINSUM: The “no pain, no deal” concept makes a lot of sense to us. The bigger question, though, is what would cause the pain because markets certainly aren’t hurting from the threat of a trade war. Maybe a big earnings miss? (See below)

(New York)

Earnings recessions don’t always hurt that much, but they don’t help. Just look at the 2015-2016 period, when earnings didn’t perform well. Markets didn’t lose much, but they were mostly flat. Now we are re-entering that paradigm, as many companies are cutting earnings and it looks like the first earnings recession in three years is coming. Earnings are very likely to fall in the second quarter, with average analyst estimates calling for a nearly 3% decline across the board. So far, 20 of the S&P 500’s companies have reported and the average earnings fall has been 15%.

FINSUM: A bigger than expected decline in earnings could seriously change the risk-reward outlook of markets. This seems like an important risk right now.

(New York)

A year ago, the FAANGs were flying high. In the previous twelve months they had risen 52% against the market’s 13% growth. The group of tech stocks has since suffered, underperforming the S&P 500 in the last year. In fact, a group of very conservative stocks have been leading the way. Call them the “WPPCK” (not as catchy, we know), which is comprised of Walmart, Procter & Gamble, Pepsico, Costco, and Coca-Cola. This group has risen 27.1% in the last year versus the S&P 500’s 7.2% gain and the FAANGs’ 5.7%.

FINSUM: It is hard to imagine a less flashy group of stocks than these, but they have been strong and steady, which seems like a good formula for this unpredictable market.

(Washington)

It is no secret that Trump is a critic of the current Federal Reserve. He has frequently complained about Powell and wishes the Fed would take a more dovish stance. Well, he took a step towards making that dovish position a reality this week as he has just appointed two notable doves to the Fed. One is Judy Shelton, an economic adviser to his 2016 campaign, who will now be on the Fed’s board. The other is Christopher Waller, who will be the head of research at the St. Louis Fed. Shelton has numerous times expressed extremely dovish views and has said she does not like the Fed’s way of setting rates and would instead prefer a market-set rate.

FINSUM: Shelton’s views are pretty revolutionary, so it seems like she could really shake things up.

(New York)

If you are feeling some relief because of the “trade truce” between the US and China, don’t. At least that is what Morgan Stanley and Bank of America are saying. Morgan Stanley explains that the current rally is very reminiscent of what happened last November, just before the market imploded and had the worst December on record. At that time, the US and China had another truce which sent markets rallying. However, bigger tensions loomed larger and set the market up for a historic fall. One of the big issues was that the seeming ”truce” stopped inventory managers from purchasing because there was no more incentive to stockpile.

FINSUM: The most interesting view here is the idea that the markets are trapped between the “Powell Put” and the “Trump Call”. That is the concept that every time markets are doing well, Trump will try to drive a harder bargain with China, and if the market falls, Powell will cut rates. In this way, markets could be trapped in a banded range.

(New York)

America tends to be very US-centric, but right now it would be wise to pay attention to some global economic signals. In particular, manufacturing is starting to look very weak across the world, and the negative wave is already impacting the US. Factory output across Europe and Asia declined in June, and the US’ barely rose. Globally, it was a second straight month of contractions, something that has not happened since 2012. More specific data showed declining sales and production in both China and Germany.

FINSUM: The US has been sprayed with Teflon for most of this bull market, but given the global nature of the trade war, it seems like we may be starting to get sucked into the downturn.

(New York)

Something the market has not had to deal with for some time is once again occurring. That change? Slumping buybacks. Hiked dividends and big buybacks have been staples of the this historic bull run, but the latter are starting drying up. Share repurchases shrank for the first time in seven quarters in the second quarter. The total amount of buybacks—over $200 bn—is still quite robust, but it is a sign that companies are tightening up, which could be indicative of the overall direction of the economy.

FINSUM: This is immaterial. In 2018, companies spent $800 bn on buybacks, so $205.8 bn (the 2nd quarter’s figure) is actually ahead of pace.

(Chicago)

In what comes as a troubling sign for the economy, but surely one good for the likelihood of a rate cut next month, new economic data shows that US manufacturing output slipped in June. The ISM manufacturing index slipped own into the territory between expansion and contraction. Perhaps more worrying than the absolute level is the fact that the index has been dropping for three straight months. However, many were expecting a worse drop, so this data was not as alarming as expected.

FINSUM: The fact that this was not as bad as expected is actually a very bearish sign, as it shows the current expectations of the market.

(Washington)

The market has the idea that the Fed holds a massive “put”. The concept entails that the Fed can effectively set a floor on asset prices because it can take dovish action to support markets at any point. However, that notion is problematic at the moment because a rate cut in the near term may actually induce a correction. In fact, markets look set for a lose-lose scenario. On the one hand, if the Fed does not cut rates, markets will be very disappointed and slump. On the other hand, investors have already priced in a near 100% chance of a rate hike, so it happening won’t give markets much of a boost and is more likely just to make investors worry that the economy is headed south.

FINSUM: We hate to say it, but we kind of buy into this view. Maybe not so much that markets will fall even if the Fed cuts rates, but the cuts certainly won’t be overly supportive at this point and may lead to a gradual decline.

(New York)

Dividend stocks have been an interesting case over the last few quarters. In the fourth quarter, when interest rates looked to be headed higher, they actually outperformed the market (counterintuitively). This year, as rates look to be headed lower, they have performed quite well (up 16%), but still lagged a bit behind the S&P 500. The question is where they go from here, and all signs point to higher given the prevailing rates environment and general anxiety. The trick is buying the right ones, as financials and healthcare offer better value than more traditional areas like utilities, real estate, and consumer staples.

FINSUM: We think these are good sector selections as they have not seen as much price inflation as the more common dividend choices. Healthcare seems particularly interesting given that it is quite recession-resistant.