Fed Chairman delivered dovish commentary in front of Congress – and the market went up. If you want to simplify the week that was what it was all about. At some point something other than the Federal Reserve is going to ease will matter but it hasn’t for a few weeks now, and until then – that is really all the market cares about. Keep in mind other central banks are joining the party and investors have been trained to get out of the way of betting against the central bankers.
Stocks broadly rallied Wednesday after the publication of Powell’s remarks before the House Financial Services Committed in which the Fed Chairman emphasized rising risks to the U.S. economy from trade policy and slowing global growth, as well as falling price inflation. Powell noted that while the U.S. jobs market remains robust and consumer spending appears set to rebound, business investment has slowed considerably, along with housing investment and manufacturing output.
“Our baseline outlook is for economic growth to remain solid, labor markets to stay strong, and inflation to move back up over time to the Committee’s 2 percent objective,” Powell said in prepared remarks. “However, uncertainties about the outlook have increased in recent months. In particular, economic momentum appears to have slowed in some major foreign economies, and that weakness could affect the U.S. economy.”
The Fed, for its part, is prepared to “act as appropriate to sustain the expansion,” Powell reiterated, using a phrase that economists say points strongly to a rate cut at the bank’s next meeting at the end of July.
“A rate cut in July is now all but certain,” Aberdeen Standard Investments senior global economist, James McCann, wrote.
Economic news was sparse.
This via Bespoke:
The third year of US Presidential election cycles (that is, the calendar year before the election year) tends to be the best time of the four-year presidential cycle to own US equities. Since 1928, years before Presidential elections have delivered a price return of more than 12% on average, versus an average return of 5.7% for all other years. As shown below, the current year is definitely the sweet spot for equities, though election years also tend to show above average returns.
There is a cautionary note here, though. As shown in the chart below, the average performance in year three of the election cycle mostly comes in the first half, with stocks flat for most of Q3 and Q4 before a solid rally into year-end. As shown in the chart below, there tend to be two pullbacks in the first half of the year. We’ve already seen one this year, coinciding with the May selloff. The second pattern of selling tends to come around the part of the calendar we’re currently in, before sideways movement until a Santa Claus rally. While the pattern of the presidential election cycle suggests further gains from now into year-end, the second half of third years is typically not as strong as the first half.
For the week, the S&P 500 gained 0.8%.
Here is the 5 day weekly intraday chart of the S&P 500 … via Jill Mislinski.
The week ahead..
It’s all about the Fed until it isn’t! Some are also calling for a 50 basis point rate cut rather than just 25. This as market’s are at record highs and unemployment near record lows.
On Tuesday, U.S. retail sales figures for June will be released. Second quarter earnings season also begins.
Short term: the NASDAQ joined the S&P 500 at new highs upon Powell’s musings.
The Russell 2000 which reflects smaller companies vs the international focus of the larger two indexes remains stalled.
The NYSE McClellan Oscillator is back where bulls want it.
Long term: can’t complain.
Charts of interest / Big Movers:
Cisco Systems agreed to buy Acacia Communications (ACIA) for about $2.6 billion, the technology giant’s latest acquisition as it seeks technologies to meet customer demand for more robust networks. The company will pay $70 a share, a 46% premium to Acacia’s closing price on Monday. Acacia’s stock surged 35% to $64.91 Tuesday.
Overstock.com (OSTK) was also in the news Tuesday – keep in mind this is now a “cryptocurrency” play. The e-commerce retail specialist’s cryptocurrency unit, tZERO, said that it will work to develop a token in connection with a major motion picture release. Atari: Fistful of Quarters will use what tZERO is calling the Bushnell token. Token owners will receive shares of movie earnings and also play a role in the development of the film by voting on the movie trailer and choosing the cast of the film.
Friday, Illumina (ILMN) updated its second-quarter guidance Thursday after the close, saying it expects revenue to be $50 million lower than previously thought and below analyst forecasts. Shares in the genetics company slumped 16.12%.
Also Friday, Milacron Holdings (MCRN) surged 23.8%, after the plastics manufacturer announced that Hillenbrand would acquire the firm in a $2 billion cash and stock deal, which valued Milacron at a 33.5% premium to Thursday’s closing price.
Have a great week and we’ll see you back here Sunday!