The market appears to continue to be in a bit of a limbo situation after last week’s Fed-fueled gains and ahead of an expected meeting between the U.S. and China.
Investors are also waiting on remarks later today from Fed Chair Jerome Powell. They will probably be listening for any new clues on the central bank’s thinking on the economy and interest rate policy, but there might not be too much new fodder for investors to digest since the Fed’s latest rate decision came just last week.
Investors have increasingly been expecting U.S. monetary policy makers to reduce interest rates this year. While lower interest rates make it more affordable for corporations to borrow money to expand operations, a Fed rate cut may come if the central bank takes a dimmer view of the economy overall. Such is the double-edged sword of monetary policy.
As the U.S.-China trade war drags on, expectations for global economic growth have faltered. Trade tensions between the world’s two largest economies arguably remain the biggest overhang for the market, which is one reason investors have been waiting with baited breath for the outcome of expected talks at the G20 summit in a few days.
A Reuters report said President Trump is “comfortable with any outcome.” That’s not too reassuring given that both sides have taken tougher stances on the dispute in recent weeks.
With the market seemingly on hold pending new developments, the situation with Iran is a wild card. Tensions continued Monday, with Trump issuing sanctions targeting Iranian officials. Iran said the move shut down the possibility for diplomatic negotiations.
While the tensions in the Middle East have helped boost oil prices and shares of energy companies, the wider market remains on edge about the possibility of an escalating confrontation with Iran. Higher oil prices would be a headwind for manufacturing and transportation companies, and further geopolitical uncertainty could be more of an impediment to global economic growth.
Earnings and an Acquisition
Before the bell Tuesday, homebuilder Lennar Corporation (NYSE: LEN) reported quarterly results that easily beat the Street view, which shows strength in demand for new homes as borrowing conditions, with lower interest rates, remain fairly favorable for buyers. LEN was up about 4% in premarket trade.
Still, overall home sales haven’t exactly knocked the cover off the ball, which could be a troubling sign given how low interest rates are and how strong the employment situation has been. Home affordability has been an issue, and it seems like consumers are wringing their hands about economic growth and tariffs. The housing market might be on slightly firmer footing, but it’s probably not out of the woods yet despite lower mortgage rates.
The news is arguably a good sign for stocks in general as merger and acquisition activity can show confidence in the health of the market and economy. That forms a counterpoint to the wider narrative of worry about global growth that has been hanging over the market.
Waiting and Seeing
The market seemed to have had a case of the Mondays yesterday, with two of the main U.S. indices erasing gains to fall a bit, but with the Dow Jones Industrial Average ($DJI) managing to stay slightly in the green despite paring its gains.
With volumes on the light side, it looked like market participants may have been staying on the sidelines to for a couple of reasons.
The first may be that they didn’t want to make bets strongly in either direction ahead of the expected meeting between President Donald Trump and Chinese President Xi Jinping at the G20 summit Friday.
While no one knows exactly what will happen, a big breakthrough on trade doesn’t seem likely. Rather, there may be some positive rhetoric followed by promises to keep talking. Or, on the other hand, there’s always the possibility that the hardening the two sides have seen toward each other could continue the stalemate.
If there’s one thing the market doesn’t like, it’s uncertainty. So it might not be too surprising to see more days like Monday’s lackluster trading ahead of the meeting, as long as the news flow is relatively quiet on other fronts.
Another reason investors may have been keeping some powder dry on Monday is that they continue to assess a more dovish-sounding Fed.
Last week, the Fed decided to put off a rate cut but still showed concerns about the economy. While a dovish Fed helped the S&P 500 Index (SPX) to gains last week, the undertones of what a rate cut could mean shouldn’t necessarily be a reason to celebrate. That’s because a rate cut would likely be a response to a softer economy, which wouldn’t necessarily bode well for corporate profits.
FIGURE 1: YELLOW METAL BREAKOUT. Gold futures (/GC) have had quite the luster this month amid geopolitical tension in the Middle East, uncertainty about the U.S.-China trade situation, and dovish indications from the Fed. Gold began the month around $1280 per ounce, but touched $1440 in early trading on Tuesday. Data source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Inflation Expectations: It’s not just the G20 summit that investors appear to be waiting for this week. On Friday, the Bureau of Economic Analysis is scheduled to release the core personal consumption expenditures price index (PCE) for May. The measure of what Americans, or those buying on their behalf, pay for goods and services is the Fed’s preferred gauge of inflation. The upcoming reading is expected to show a 0.1% gain for the month, according to a Briefing.com consensus. That would mark a slowdown from the previous month’s reading of 0.2%. If inflation does come in lower, and especially lower than expected, that could lead to a solidifying of expectations for the Fed reducing interest rates this year.
Mixed Messages: The market seems to be facing a bit of a mixed bag when it comes to sentiment at the moment. On the one hand, a dovish-sounding Fed has provided some optimism. But there are worries surrounding the Iran situation, and uncertainty about the continuing trade war isn’t likely to get all wrapped up at the G20 summit. The market also has entered a typically weak period based on seasonality. “We think this bull market has further to run, though it could hit some seasonal bumps in the road during the traditional ‘sell in May’ period from a variety of fundamental uncertainties,” investment research firm CFRA said. The phrase “sell in May and go away” refers to the market often being weaker from May through October relative to the other six months of the year.
Divergent Oil Stocks: Tensions involving Iran have helped boost oil prices, and crude prices gained on Monday. But rising oil futures come against a backdrop of expectations for lowered global demand. Perhaps partly reflecting that sentiment, Energy was the worst performing of the SPX sectors on Monday despite the gains in oil prices. That also may have had something to do with profit-taking after recent gains.
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