Stocks reversed earlier losses and opened higher. Stocks’ resilience over the past 20 hours after a slightly hawkish set of projections from the Federal Reserve (Fed) is encouraging. Few major drivers this morning are in play, but investors are digesting a number of global central bank actions this morning. Meanwhile, Middle East tensions remain elevated, deputy-level U.S-China trade talks will take place today amid speculation that an interim deal is taking shape, and Microsoft announced a new share buyback authorization.
Fed hits it down the middle. As expected, the Fed’s policy committee cut its policy rate by 25 basis points (.25%) to a target range of 1.75%-2%. This comes on the heels of the first rate cut in more than 10 years at the end of July. This cut is somewhat more controversial, however, because the overall U.S. economic data has been improving, and there’s been a tick higher in inflation. In our latest LPL Research blog, we take a look at how stocks have done after a rate cutting cycle begins with two 0.25% cuts, as in this cycle, as opposed to the 2001 and 2008 cycles that began with 0.50% cuts that preceded recessions.
Fed “dot plots” revealed diverse views. According to the Fed “dot plot” of individual expectations, only 7 of 17 members favored additional cuts this year, somewhat more hawkish that some had anticipated. There were two dissenting voting members on the Fed policy committee in July, and once again two members opposed Wednesday’s cut–but unlike last time, there was also one dissenter (Bullard) who favored a larger 50 basis point (.50%) cut. We still think the Fed will cut one more time this year, but markets may be a bit more skeptical after yesterday’s announcement.
U.S. earnings remain resilient. Global earnings estimates have fallen recently, consistent with the historical annual pattern. However, S&P 500 Index estimates for 2019 have held up best, dipping just 1.5% over the past three months, compared to the 2.5% and 4.3% reductions in estimates for the MSCI EAFE (developed international) and MSCI Emerging Markets indexes. Despite the nearly 20% discount in the forward price-to-earnings ratio for developed international equities relative to U.S. (the historical average is roughly a 10% discount), we believe the economic and earnings backdrop in the U.S. is good enough to justify our preference for U.S. equities over EAFE. Deteriorating emerging markets earnings is concerning, but we are encouraged by stabilization in September, and we maintain a positive long-term outlook.
OECD lowers global growth forecasts. The Organisation for Economic Co-operation and Development (OECD) cut its global economic growth forecast for 2019 by 0.3% to 2.9%, citing trade conflicts and insufficient fiscal policies. Almost all of the G20 countries saw downward revisions, particularly those most exposed to global trade and investment. Despite the OECD’s global growth forecast cut, the U.S. forecasts for gross domestic product growth in 2019 and 2020 remain at or above the 2.0% trend for the expansion.
August LEI set to release this morning. At 10 a.m. ET the Conference Board will release its latest Leading Economic Index (LEI) reading for the month of August. Investors watch this index closely for its strong historical ability to predict economic downturns, as we have not experienced a recession since 1955 without the index first falling negative year over year. In today’s LPL Research Blog, we’ll assess today’s latest numbers and the implications for domestic economic growth prospects.
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