Stocks could get interesting again after Fed rate cut
1. Stocks could get interesting: The Federal Reserve will probably cut rates this week. It could be the start of a summer rally in stocks.
Usually, the month of August is quiet for markets, as investors go on vacation. But this summer could be an upbeat exception to the norm if this week’s expected interest rate cut sends the stock market off to the races.
The market has been excited about a rate cut for nearly two months.
In June, Fed Chairman Jerome Powell said the central bank would act as appropriate to prolong the expansion of the US economy. Since then, the S&P 500 and the Dow have rallied 10.1% and 9.4%, respectively.
That rally could continue after the Fed decision. Lower interest rates make borrowing cheaper for companies, which help business’ bottom lines and boost the stock market. Expectations for a quarter-percentage-point rate cut stood just below 80% on Friday, with the remaining odd 20% forecasting a half-point cut.
But does the U.S. economy need the boost?
The current economic growth cycle is a decade old and, with looser monetary policy from the Fed, it could go on for longer. America’s economy isn’t exactly on the brink of collapse regardless of whether and by how much the Fed cuts rates. But in the first half of 2019, manufacturing showed some weakness, and business investments were muted as companies worried about developments on the trade front. On top of that, inflation pressures have remained low.
But American consumers kept on spending. Consumer sentiment remains solid, confirmed by Friday’s stronger-than-expected second-quarter GDP report.
With a rate cut — the first since 2008 — fully priced in, the market’s attention will turn to what’s next. With only a limited amount of economic data to assess the state of the economy between the July and September Fed meetings, the central bank could hold back on another rate cut until later in the year. The market is pricing in another cut before the end of 2019.
Expectations for rate cuts in September, October and December are at 100%, according to the CME FedWatch tool.
Another way the US economy could get a boost: Ending the trade war.
“If tariffs get settled that will serve as another rate cut in terms of juicing the market,” said JJ Kinahan, chief strategist at TD Ameritrade.
Although the United States and China have agreed on a tariff truce, the trade battle remains unresolved. That’s weighing on business confidence and the amount companies are investing.
2. Apple earnings: Apple will report its quarterly earnings Tuesday, and it hopes to prove to investors it can move beyond its China problems.
Apple warned investors in January that iPhone sales had been hurt by the slowdown in China’s economy and an ongoing trade war. But last quarter, CEO Tim Cook signaled that the worst may be over as Apple sees signs of improvement in the Chinese market. Cook said he was encouraged by improved trade dialogue between China and the United States and customers’ positive response to lowering prices in Asia.
Wall Street analysts are divided about whether Apple can turn its iPhone fortunes around. Jun Zhang, China analyst at Rosenblatt Securities, downgraded Apple earlier this month, predicting the iPhone XS will wind up being “one of the worst-selling iPhone models in the history of Apple.”
Despite Cook’s optimism, the Trump administration could raise tariffs on Apple’s products in the near future. President Trump tweeted Friday that if his administration goes forward with its new round of import levies on Chinese goods, he will refuse to exempt Apple from paying tariffs on parts for the new Mac Pro, which Apple reportedly will make in China. Apple manufactures the current version of the Mac Pro in Texas.
3. GE earnings: General Electric’s slumping power division continues to drag down the company’s profit, and GE is burning through cash. But investors know that by now. They’re hoping GE can continue to demonstrate progress in its turnaround.
Despite tumbling earnings, GE has stood by its 2019 guidance for industrial free cash flow throughout the year. But GE faces a new threat: the Boeing 737 Max crisis.
Boeing said last week it is preparing for a 737 Max production shutdown in case it does not receive approval to fly the grounded plane again this year. That would serve as a setback for GE, which makes jet engines for the 737 Max.
GE will report earnings Wednesday.
4. Jobs report: The US Bureau of Labor Statistics will release its July jobs report on Friday.
Economists expect the US economy added 160,000 jobs in July, and they predict the unemployment rate fell to 3.6%.
The US economy added 224,000 jobs in June, a strong comeback for the labor market after a disappointing May.
5. Coming this week:
Monday — Beyond Meat reports earnings
Tuesday — Apple, Sprint, Mondelez, Under Armour and Procter & Gamble report earnings.
Wednesday — Fed rate decision; GE, Occidental Petroleum, Molson Coors, and Qualcomm report earnings
Thursday — General Motors, Dunkin’, Kraft Heinz and Verizon report earnings
Friday — Exxon, Chevron and Berkshire Hathaway report earnings