July 9, 2019

The old Wall Street maxim of climbing the “wall of worry” has to do with the stock market surmounting a number of negative factors while ascending to new high ground. As of last week’s holiday-shortened action, the market’s resilience to any new stumbling blocks is to be admired, if not respected.

I’ve called for the S&P to hit 3,000 by year’s end. We’re there, or within 10 points of being there. Few expected Edmond Hilary to summit Mount Everest on his first attempt, but on May 29, 1953 he did it.

This impressive stand by the bulls has come at a time when skepticism about any further market gains is running high – leaving many to wonder how and why this torrid 10% rally for the S&P off the June 3 low came to be. After all, the current takeaway from the G20 Summit is that nothing has really changed. The current tariff structure remains in place and the U.S. gave in to corporate pressure to sell products to Huawei. Talk of new tariffs on European goods is getting traction and tensions with Iran are on the rise.

Much of the credit for the June rally is being awarded to Fed Chairman Jerome Powell and the other Fed officials by putting their oral stamp on the assumption that a rate cut of at least a quarter-point is a “done deal” at the upcoming FOMC meeting scheduled for July 30-31. The latest Fed language is that a rate cut will be for “insurance purposes” and not because the economy is faltering. Who said a good old-fashioned Twitter-lashing from the White House doesn’t carry some weight?

Conversely, institutional bond investors would have nothing of it and are operating in lockstep by hoarding U.S. and other investment-grade sovereign debt as if the world were going to run out of newly issued debt. Global bond markets have rallied sharply in response to weakening economic data and a dovish fiscal narrative from leading central banks, which has taken the benchmark 10-year Treasury yield down to 2.05%, a level not seen since the fourth quarter of 2016.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Amazingly, 25% of all the government debt around the world now has negative yields, most of which is issued by 14 European nations. This is rather perplexing and underscores the level of rising worry among investors about a hard landing for the European economy.

This past week’s Global PMI survey signaled that manufacturing further contracted during the month of May, posting its lowest reading since October 2012. The J.P. Morgan Global Manufacturing PMI – a composite index produced by J.P. Morgan and IHS Markit – fell to 49.8 in May, down from 50.4 in April. (Any number below 50.0 means that the world’s factory output is contracting.)

More importantly, the ISM Manufacturing PMI in the U.S. fell to 51.7 in June from 52.1 in May, marking the slowest pace of expansion in the factory sector since October 2016. The U.S. economy accounts for 21.6% of global GDP, followed by China at 12.7%, Japan at 7.7%, Germany at 4.8%, and France at 3.6%. This group makes up 50.4% of global GDP, so when this group sneezes, the rest of the world gets a cold.

What raised a lot of eyebrows is that, according to the J.P. Morgan Global Manufacturing PMI report, “The downshift in growth in the U.S. was the main driver of the slowdown in global manufacturing, as the U.S. PMI slipped to its lowest level in almost a decade (since September 2009).” With this information in hand, it’s safe to say that the Fed, the European Central Bank, and other global reserve banks will be cutting short-term interest rates in the weeks and months ahead.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

A Confluence of Factors – and Plenty of Confusion

Forget the short-term negative factors that would typically derail a market, which once had investors walking on eggshells. Instead, investors have bought into the macro argument that the Federal Reserve will begin aggressively cutting interest rates while central banks in China, Japan, and Europe will pursue more aggressive fiscal stimulus measures. It’s believed that this coordinated central bank intervention among the most powerful central banks will provide a floor under the global economy, creating a second half reacceleration of growth that can be invested into. It’s a conundrum for sure, and at the same time, the “fear of missing out” or FOMO, has underinvested professional and retail investors paying up for stocks that led to a melt-up of sorts this past week. So much for summer doldrums in the stock market.

That’s the big picture. Investors love rate cuts, which provide the steroids for a higher stock market, even as the S&P trades at a forward P/E of 17x, above its 5- and 10-year historical averages. Additionally, with the world awash in low-to-negative bond yields, juicier yields from stock dividends that enjoy preferential tax treatment are driving capital flows into equity markets with less regard for earnings growth – at least for now. This might be why P/E multiples are expanding while earnings growth is decelerating.

I find this fluid situation one of the most interesting times in my investing career, and though I too ponder if the current slowdown is just temporary, I’m not about to fight the tape.

About The Author

Bryan Perry

Bryan Perry

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry


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