Most investors spend their time worrying the Fed is going to cut the party short. Historically speaking, that has often been the role of the central bank—keeping things from getting too out of hand. However, Fed chief Powell does not appear to want to be the sober chaperone at the party this year, as the dovish positioning is heavy. Accordingly, there seems to be a strong chance of a melt up in stocks right now, or a big late stage rally. UBS, however, says the opposite, arguing that investors will stay hesitant because of high valuations and weak earnings.
FINSUM: We don’t think there will be a melt up. We just think the market will re-enter the post-Crisis goldilocks mode they were in, where rates are low and the economy is healthy, clearing the way for multiple expansion.
Gold is having a good year, up almost 10% after a very long bear market. But where might it be headed now that the Fed is likely going to start a cutting cycle? The answer is probably significantly higher. The macro backdrop is perfect for gold—geopolitical tensions are high, there are worries over the domestic and global economy, the Fed is going to be cutting (lower rates are better for zero-yielding gold), and the Dollar is likely to weaken, making gold cheaper for overseas buyers.
FINSUM: We agree all the ingredients are there, but if the Fed starts cutting, it may alleviate a lot of worries about the economy and make risk assets look more favorable.
The Fed has historically been the level-headed kid at the party, always trying to calm things down when they got out of hand. But that appears to no longer be the case, as Powell surprised even the most dovish investors with his very soft statements last week. What comes next may shock markets—some think the Fed will make a rare 50 bp cut in their July meeting. How the market would react is anyone’s guess (likely positive initially). “Historically the Fed has wanted shock and awe when they ease”, says the CIO of Northwestern Mutual Wealth Management.
FINSUM: The Fed seems like it wants to go big, despite the fact that unemployment is at record low levels and prices are stable. The central bank clearly wants to keep the bull market rolling.
Goldman Sachs thinks the Dollar might be in a for big surprise. On top of his grumbling about the Fed not lowering rates quickly enough, President Trump has been tweeting about the unfair advantage that other countries have in lowering their value against the Dollar. Trump apparently wants a weak Dollar to help the US compete more effectively in the global economy. Accordingly, Goldman Sachs think there is a good chance that Trump uses some special tool to intervene and weaken the currency, such as through the Treasury department.
FINSUM: This is not as unprecedented as it sounds. Even Powell has said the Treasury is the traditional power in charge of exchange rate policy. This would likely have a big impact on markets.
Are you looking for a good dividend stock? Well, we have one for you. How about a stock that has risen 27% this year yet still has a 4% dividend yield and a very solid business? If that sounds good, take a look at Prudential Financial. The company is an asset manager and insurance provider, and has solid growth and financials and seeks to be financially prudent. “We believe in a very consistent and regular dividend that will be aligned with our earnings growth, says the CFO. The company has expected earnings growth of 8% this year.
FINSUM: Prudential is a pretty sleepy name, but there is nothing boring about a 4% dividend combined with earnings growth and market-beating price appreciation.