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.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted.
All company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.
All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges, Index performance is not indicative of the performance of any investment.
Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
All performance referenced is historical and is no guarantee of future results.
This research material has been prepared by LPL Financial LLC.
Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC).
Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL Financial affiliate, please note LPL Financial makes no representation with respect to such entity.
- Not Insured by FDIC/NCUA or Any Other Government Agency
- Not Bank/Credit Union Guaranteed
- Not Bank/Credit Union Deposits or Obligations
- May Lose Value
For Public Use – Tracking # 1-895187