Market Update: Thur, July 11, 2019 | LPL Financial Research

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Daily Insights

Dovish Fed comments support global equity markets. Federal Reserve (Fed) Chair Jerome Powell’s testimony to Congress yesterday and the release of the minutes from the Fed’s June policy meeting confirmed that the Fed is eyeing a potential rate cut in July to insulate the economy against shocks from trade and slowing global growth. U.S. equities rose, short-term Treasury yields fell along with the dollar, and gold caught a bid in response. Global markets have followed through overnight, and U.S. stocks are poised to gain in early trading.

3,000! Powell’s dovish testimony comments propelled the S&P 500 Index as high as 3,002.98 in yesterday’s trading, the first time the index has broken the 3,000 threshold intraday. It took the S&P 500 almost five years to reach this milestone after crossing 2,000 for the first time in August 2014. Coincidentally, our S&P 500 fair value target is also 3,000, so U.S. stocks could be ripe for near-term volatility. Given we don’t see an impending recession, we would use a pullback as an opportunity for suitable investors to rebalance portfolios, with a tilt toward value, cyclicals, and emerging markets in suitable strategies.

Developed international economies start to stabilize. The OECD’s Composite Leading Indicators (CLI) are signaling expectations of weaker growth momentum for the U.S. compared to other developed international economies, but much of the difference is simply a matter of current growth rates. U.S. growth remains above trend for now, while international economies have already slowed substantially. Nevertheless, slowing U.S. growth momentum may be reflected over time in a somewhat weaker dollar and some potential rotation to international investments. We remain concerned about structural impediments to growth in developed international economies. We still favor the United States, and prefer emerging markets for international exposure.

Consumer inflation picks up. Consumer inflation is showing signs of life after slowing earlier this year. Year-over-year growth in the core Consumer Price Index (CPI), which excludes food and energy prices, rose to 2.1% in June. June’s CPI growth corresponds with core personal consumption expenditures (PCE) growth slightly below the Fed’s 2% target (based on the two gauges’ historical relationship). Slowing consumer inflation has strengthened the argument for a Fed rate cut, and June’s data show consumer inflation may still need a boost to hit Fed expectations.

A deep rate cut? Fed fund futures are pricing in a 25% chance of a 50 basis point (0.50%) rate cut this month, and the possibility of a deep rate cut was mentioned in Powell’s July 10 testimony to the House Financial Services Committee. The Fed has prepared investors for a July rate cut, but we’d be surprised to see a rate cut larger than 25 basis points (0.25%). We’ll outline the history of deep rate cuts in today’s LPL Research blog, and highlight why we think dramatic Fed action isn’t needed right now.

 

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