Home About Archives RSS Feed

@theMarket: When Bad News Is Good News

By Bill SchmickiBerkshires columnist
You would think that a non-farm payroll report that was way below expectations would give investors pause. After all, when the pace of employment slows, it usually means that the economy is slowing as well. So why did the stock market spike higher?
 
It comes down to what the Fed may do. Contrary to many investors' belief that tariffs (or the lack thereof) are the critical element in the stock market's fortunes, I believe the actions of the U.S. central bank trump Trump's antics on the trade front. 
 
A look back to the last quarter of 2018 reveals why I believe this is so. While the press gave plenty of space to the on again, off again China/U.S. trade negotiations, the Fed's program of raising interest rates is what sent the markets into decline. In December, once the Fed realized that raising rates in an economy that was not overheating was a mistake, they reversed course, announcing any further rate rises were "on hold" until the data dictated otherwise.
 
From the end of December through the beginning of May, the U.S. stock market rocketed higher, regaining much of its 19 percent fourth quarter loss, even though no progress had been made on the trade front whatsoever.
 
Fast forward to last month. Trade negotiations between the U.S. administration and their Chinese counterparts hit a brick wall. Markets dropped more than 5 percent. Last week, The President's sudden threat to raise tariffs on Mexican imports by 5 percent added to the carnage with an additional drop of 2-3 percent.
 
While I wrote last week that I doubted (and still do) that those Mexican tariffs would actually be implemented, as of today nothing has changed on the trade front and yet the markets are up considerably. Look to the Fed for an answer.
 
The threat of new tariffs both in China and now Mexico, on the back of an economy that is growing moderately, triggered concerns that we could be setting ourselves up for a recession as soon as 2020. U.S. Treasury bond prices plummeted and within days investors were speculating that the Fed may need to move off their neutral stance and actually cut interest rates.
 
Now the market is betting on anywhere from two to three interest rate cuts by the Fed over the next 12 months. That is a drastic reversal of course from a mere six months ago when most believed the opposite would occur (more rate hikes).
 
Within this context, the jobs report was further evidence of an economic slowdown, which then bolstered expectations that the Fed would need to cut rates sooner rather than later. As such, investors have been conditioned to expect that looser monetary policy by the Fed translates into higher stock prices. It has been the way of the world for the last decade, so weaker macro numbers equate to buy, buy, buy.
 
As a result, with the Fed at our backs, I expect stocks to continue higher. How high, you might ask? At least to the old highs of the S& P 500 Index (2,944), which is a little under 100 points upside from here. Could it trade even higher? Yes, if the following occurs: Tariffs on Mexico are not levied, some accommodation with China on trade negotiations is made (a mini breakthrough) and/or the Fed makes a stronger statement on rate cuts.
 
On the downside, second-quarter earnings, which are coming up, might not be up to expectations, in addition to further escalation in Trump's trade war (more tariffs, counter tariffs, etc.). That would not only cap the markets on the upside, but could also establish a rather wide trading range throughout the summer with the lower boundary equating to the recent lows on the S&P 500 Index (2,744).
 
Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $400 million for investors in the Berkshires.  Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
 

 

     

Support Local News

We show up at hurricanes, budget meetings, high school games, accidents, fires and community events. We show up at celebrations and tragedies and everything in between. We show up so our readers can learn about pivotal events that affect their communities and their lives.

How important is local news to you? You can support independent, unbiased journalism and help iBerkshires grow for as a little as the cost of a cup of coffee a week.

News Headlines
Scoil Rince Bréifne Ó Ruairc Participated in North American Open Championships
Pittsfield Police Participating in US 20 Speed Enforcement Project
MassDOT Project Will Affect Traffic Near BMC
Dalton ADA Committee Explores Expanding
Milne Public Library Trustees Announce New Library Director
Clark Art Presents Free Thematic Tour on Music in Art
BCC, Mill Town Partner to Support Philanthropy Through 40 Under Forty
SVMC' Wellness Connection: March 15
Pittsfield Community Meeting On Rest of the River Project
Slavic Easter Egg Decorating At Ventfort Hall
 
 


Categories:
@theMarket (480)
Independent Investor (451)
Retired Investor (183)
Archives:
March 2024 (5)
March 2023 (4)
February 2024 (8)
January 2024 (8)
December 2023 (9)
November 2023 (5)
October 2023 (7)
September 2023 (8)
August 2023 (7)
July 2023 (7)
June 2023 (8)
May 2023 (8)
April 2023 (8)
Tags:
Debt Metals Debt Ceiling Interest Rates Markets Election Selloff Currency Pullback Bailout Recession Retirement Energy Japan Europe Commodities Congress Greece Rally Banking Fiscal Cliff Europe Euro Stock Market Oil Stimulus Employment Stocks Crisis Deficit Federal Reserve Economy Banks Jobs Taxes
Popular Entries:
The Independent Investor: Don't Fight the Fed
Independent Investor: Europe's Banking Crisis
@theMarket: Let the Good Times Roll
The Independent Investor: Japan — The Sun Is Beginning to Rise
Independent Investor: Enough Already!
@theMarket: Let Silver Be A Lesson
Independent Investor: What To Expect After a Waterfall Decline
@theMarket: One Down, One to Go
@theMarket: 707 Days
The Independent Investor: And Now For That Deficit
Recent Entries:
@theMarket: Sticky Inflation Slows Market Advance
The Retired Investor: Eating Out Not What It Used to Be
@theMarket: Markets March to New Highs (Again)
The Retired Investor: Companies Dropping Degree Requirements
@theMarket: Tech Takes Break as Other Sectors Play Catch-up
The Retired Investor: The Economics of Taylor Swift
@theMarket: Nvidia Leads Markets to Record Highs
The Retired Investor: The Chocolate Crisis, or Where Is Willie Wonka When You Need Him
The Retired Investor: Auto Insurance Premiums Keep Rising
@theMarket: Melt-up in Markets Fueled by Momentum