As I wrote at start of year "Third year is Best", 2019 is turning out to be exactly like that and more. In 3rd year of president's term, markets have been up on average of 15%. This year, S&P is up by 20% and only half the year is over. So does that mean we have seen all the gains for 2019 already? With earnings season about to get into high gear, let's look at key factors which would decide what's in store for markets.
Earnings:
Next two weeks, large number of companies would be reporting 2nd quarter earnings and provide forecast for 2nd half. While some companies have started warning season (e.g ILMN), it has been relatively quiet on warnings front. Analysts have already lowered their expectations. Economy is not doing as badly as feared at start of year. Trade noise is subsiding. So majority of companies would meet/beat earning forecasts and provide cautiously optimistic forecast. The earnings show is becoming too predictable. No one likes surprises. So companies which manage avoiding surprises would get rewarded and those who will not, will get punished.
Tariffs and Trade:
Another G20. Another patch-up between Trump and Xi. The "Game of Brinkmanship" continues. These half-yearly meet ups are becoming as exciting and at same time predictable as episodes of just concluded "Game of Thrones". With recent G20, both presidents did some patch up and asked their representatives to restart talks even though there are some major differences in policy. The show will continue in fall but given 2020 election cycle, Trump needs to show some victory on this front. He could also use his hard-stance to force lead democratic candidates (Biden) to take position.
Fed and Interest Rates:
Of all these factors, this is the most important factor supporting markets and economy. Fed chairman changed the tune of 3 interest rate hikes in 2019 to potentially 2-3 interest rate cuts in 2019. What happened for this sudden change of heart? Many factors: there is some softness in world economic growth, inflation is stubbornly staying below 2%, trade war fears and constant pressure from President Trump (even though it's not acknowledged). Fed chairman Greenspan extended the 90's expansion by cutting rates in 1998 giving the reasons of LTCM blowout, Russian currency crisis and markets continued to party till 2000. Fed is doing something similar in 2019. That means it would be all clear for markets to party till end of 2020. This expansion is already the longest expansion on record (records are kept since 1854). Fed is going to keep the party going for another few quarters. So if you are thinking of investing, don't fight the fed and invest in S&P indexwhen opportunity presents in Fall (Sept/Oct) when some correction could happen!
/Shyam
Earnings:
Next two weeks, large number of companies would be reporting 2nd quarter earnings and provide forecast for 2nd half. While some companies have started warning season (e.g ILMN), it has been relatively quiet on warnings front. Analysts have already lowered their expectations. Economy is not doing as badly as feared at start of year. Trade noise is subsiding. So majority of companies would meet/beat earning forecasts and provide cautiously optimistic forecast. The earnings show is becoming too predictable. No one likes surprises. So companies which manage avoiding surprises would get rewarded and those who will not, will get punished.
Tariffs and Trade:
Another G20. Another patch-up between Trump and Xi. The "Game of Brinkmanship" continues. These half-yearly meet ups are becoming as exciting and at same time predictable as episodes of just concluded "Game of Thrones". With recent G20, both presidents did some patch up and asked their representatives to restart talks even though there are some major differences in policy. The show will continue in fall but given 2020 election cycle, Trump needs to show some victory on this front. He could also use his hard-stance to force lead democratic candidates (Biden) to take position.
Fed and Interest Rates:
Of all these factors, this is the most important factor supporting markets and economy. Fed chairman changed the tune of 3 interest rate hikes in 2019 to potentially 2-3 interest rate cuts in 2019. What happened for this sudden change of heart? Many factors: there is some softness in world economic growth, inflation is stubbornly staying below 2%, trade war fears and constant pressure from President Trump (even though it's not acknowledged). Fed chairman Greenspan extended the 90's expansion by cutting rates in 1998 giving the reasons of LTCM blowout, Russian currency crisis and markets continued to party till 2000. Fed is doing something similar in 2019. That means it would be all clear for markets to party till end of 2020. This expansion is already the longest expansion on record (records are kept since 1854). Fed is going to keep the party going for another few quarters. So if you are thinking of investing, don't fight the fed and invest in S&P indexwhen opportunity presents in Fall (Sept/Oct) when some correction could happen!
/Shyam
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