‘It’s deja vu all over again’

yogi_berra_-_Google_SearchBy David Nelson, CFA CMT

In the immortal words of Yankee great Yogi Berra; ‘it’s deja vu all over again.’ Once again bad news is good news as traders jumped all over Friday’s weak employment report, firm in the belief that the Fed will respond with its first rate cut since the depths of the financial crisis.

After 9 consecutive hikes starting in 2016, markets around the world have forced the Fed to rethink policy. Wednesday’s ADP data gave investors their first hint that Friday’s employment report might disappoint. Non-farm payrolls coming in at just 75k well under the 185k expected triggered a knee jerk reaction lower that was quickly faded as investors scooped up shares for the remainder of Friday’s session. Bulls went into the weekend smiling on the heels of the best week for stocks in 2019.

S&P 500 1 Year
Sp500 june

Despite the celebration there was still concern even with assurances from the White House that talks with Mexico were proceeding as planned. A little more than a week earlier the administration announced trade sanctions unless something was done to end the border crisis. The Monday deadline for a 5% tariff escalating to 25% on all goods coming from our neighbor to the south loomed large as another obstacle for investors still feeling the pain from last month’s drubbing as trade negotiations with China dragged to a halt.

Fed Funds – 20 years
Fed Funds

On Saturday, investors got the all clear signal as both the United States and Mexico announced an agreement. According to the Wall Street Journal; under Friday’s deal, Mexico agreed to increase enforcement to curb migration from Central America. Mexican officials had spent much of the week in Washington talking about the steps already taken at Mexico’s southern border with Guatemala, including plans to deploy 6,000 troops from its newly established National Guard.

Don’t Fight the Fed

In past battles investors have been forced to learn the lesson “don’t fight the Fed.” Nevertheless, it begs the question are low rates enough to support a market that once again is less than 3% from another all-time high? Multiple expansion on its own isn’t going to get us to the promised land.

In the end it comes down to improved economic activity, earnings and cash flow to drive equity prices higher. After all, just what does a stock certificate represent? Stocks are a contract between the company and the shareholder giving those same shareholders their pro-rata share of the earnings and in turn dividends of the company. Even if we break to new highs confident the Fed has our back, I doubt we can maintain altitude unless we refuel.

Calendar Year Estimates (Data by FactSet)
Stair Steps Lower

The table from last week’s post showing earnings estimates for 2019 took another step lower. A picture that has continued to deteriorate since September last year. At the very least I need to see this bottom before I can say the coast is clear. Add the fact that the rest of the world is in an economic malaise held up by negative rates and the picture gets a bit darker.

‘It’s not over till it’s over’

Mr. Berra had a lot of wisdom to share and maybe the most useful for investors is his comments during the 1973 pennant as he guided the Mets to the World Series. “It’s not over till it’s over.” It’s a wonderful story and maybe a phrase we can utter in the face of any hardship but it’s important to remember the following. The Mets LOST!