The market is in the worst shape it has been for some time, maybe the worst condition of the year. The S&P 500 fell over 3% last week on the combined news of a less dovish Fed and a huge tariff increase on China. Where things go from here is very uncertain, but JP Morgan is arguing that you should buy the dip. The bank’s strategists summarize their view this way, saying “Our core view remains that one should use the prospective weakness as an opportunity to add further, similar to the May experience. We continue to believe that global equities will advance further before the next U.S. recession strikes. We think that the growth-policy trade-off is far better now than it was in 2018”.
FINSUM: The market, economy, and politics are at quite a confusing point right now. Either things will gel to send prices higher, or it will all come crashing down like it did last year. Anyone’s guess.
The market is going through a fit, and it is entirely self-induced. Firstly, the Fed hit markets with an unexpected lack of dovishness earlier this week. Then, just a day after, President Trump did what many feared he would—he announced another large round of tariff hikes on $300 bn of Chinese goods. Many suspect the move is part of an effort to push the Fed into cutting rates after it downgraded its language to calling the trade war merely a “simmer”. Markets fell sharply on the news.
FINSUM: Trump is trying to push both China and the Fed. It will likely work with the former, as they don’t have much of a choice if the economy looks vulnerable, but this is certainly not going to help China get back to the table.
Right now is high time for investors to be worried about bonds. Bond funds have received a lot of fast money in recent months because of the well-telegraphed rate cut. According to BAML, the net inflows into fixed income funds have reached a “staggering record” of $455 bn in 2019. That compares to just $1.7 tn in the last decade. Yields have tumbled this year, with ten-year yields down from 3.2% in November to just 2.06% now.
FINSUM: The outlook for bonds got murkier yesterday with the Fed’s relative lack of dovishness. It is not entirely clear that rates are going to keep falling, so it is not hard to imagine bonds facing some losses now given how much speculation there was of a large Fed rate-cutting program.
The Fed meeting yesterday was not what everyone expected. While the central bank did cut rates 25 basis points, the commentary was far from what investors expected. The attitude on the Fed had turned so dovish prior to the meeting that some thought Powell might cut rates by 50 bp. The whole meeting took a different course, with the Fed saying this was just a “mid-cycle adjustment” and refusing to commit to a further cutting plan. This upset markets, with indexes all diving over 1%.
FINSUM: We think this was smart from the Fed and ultimately good for markets. It left things more uncertain as to policy and direction, which means stocks will trade more on fundamentals. This reinstates the “wall of worry” that always seems necessary to build bull markets.
We are back in the weird world of the 2013-2016 era. Remember the time when weak/moderate economic news was great for stock prices? Welcome back. Investors are hoping that economic data trends flat or just a tiny bit weak, which would cause the Fed to loosen policy. However, if the economy does well, that would lead to tighter monetary conditions, which investors don’t favor. Therefore, right now, bad economic news is good for the market, and vice versa.
FINSUM: We have always found these kind of “goldilocks” scenarios rather perverse, but they are the reality nonetheless.