The Dow Jones Industrial Average, the S&P 500 Index, and the Nasdaq Composite Index all posted record highs last week as investors celebrated Federal Reserve Chairman Jerome Powell's dovish comments on monetary policy immediately ahead. Despite recently strong employment data and a surprising upward blip in domestic inflation data, Chairman Powell confirmed the consensus Wall Street view that an "insurance" cut in short term interest rates was likely at the next Federal Open Market Committee now scheduled for the end of July. Action in the Fed Funds futures market suggests a 100% probability of at least 1/4 point cut in the Fed Funds interest rate following the July FOMC meeting. This same futures activity also seems to indicate that traders are expecting at least one more 1/4 point cut after July this year and maybe even two 1/4 point cuts before year-end 2019.
Surprisingly, mid-term and longer-term Treasury securities prices actually fell last week despite this dovish news from Fed Chairman Powell (see chart below). After falling below 2.00%, the yield on the benchmark 10-year T-note jumped to 2.11% by the end of last week, and the yield on the 30-year T-bond jumped to 2.63% after falling below 2.50%.
Obviously, higher mid-term and longer-term interest rates did not stifle investors' love affair with U.S. equity prices, but perhaps investor enthusiasm is misplaced?
Here are some factors which are likely to dampen further enthusiasm for U.S. equity prices immediately ahead:
1. Corporate earnings are likely to be negative year-over-year in the 2nd quarter just ended. And Wall Street analysts will soon ratchet down earnings expectations for the rest of this year AND next year as well.
2. While the Federal Reserve talks dovish, so-called "quantitative tightening" is ongoing with regular sales of Treasury and Mortgage-backed securities from the Fed's balance sheet at a pace that still exceeds $30 billion per month. More than $475 billion in Treasury and Mortgage-back securities have been sold from the Fed's bloated balance sheet over the past 12 months (-11.2% of total portfolio).
3. The Federal budget deficit this fiscal year is likely to exceed $1 trillion. Treasury issuance to fund this deficit may serve to "crowd out" corporate and municipal funding needs and provide upward pressure on interest rates. Despite a dovish Federal Reserve, an unexpected liquidity crisis could easily develop.
4. Next year's Federal budget negotiations are already underway and they are contentious (at best). No budget deal is anticipated by the end of the current fiscal year September 30, 2019, which will add to rising uncertainty on this key issue in the financial markets.
5. China is NOT likely to negotiate a friendly trade deal with the United States while Donald Trump remains in office. China's leadership knows that the Trump tariffs are unpopular in the U.S., even among Trump supporters in Congress.
6. The Democrats are almost certain to win the Presidential election in November 2020 and it is my strong view that the Dems will also win a majority in the Senate (as 22 Republican senators are up for re-election). If a Democrat is elected President, then the Dems only need to win 3 Senate seats, on balance, to secure an effective majority (as the Democratic Vice President would then own any tie-breaking votes).
7. The Democrat Presidential candidates will soon be asking Americans the same question that Ronald Reagan asked in 1980 when he successfully upset the incumbent President Jimmy Carter. That question is "Are you better off now than you were four years ago?" For most Americans that answer is a resounding "NO", as Trump has failed to deliver on his promise of better health care, badly needed infra-structure spending, a balanced Federal budget deficit, and above-trend growth in the domestic economy. Trump's "drain the swamp" mantra will be the subject of serious questions by the Democrats given the plethora of investigations and resignations among Trump's Cabinet and from his inner circle.
8. Rightly or wrongly, the Jeffrey Epstein sex scandal will negatively impact Donald Trump as Americans begin to view Mr. Trump's less-than-mainstream behavior as unattractive, and Trump will no longer be viewed as the "outsider" who will shake up Washington politics in favor of the "forgotten man".
9. I renew my prediction that Donald Trump will resign from office before the November 2020 election with a full pardon for himself and his family by then President Mike Pence. Among the factors that will unseat President Trump are rising trade tensions globally (especially with China and Europe), ongoing clashes with Congress over Executive war powers (Iran, Saudi Arabia, Yemen, Syria), immigration problems on America's southern border, escalating investigations of the Trump Administration from oversight committees in the House of Representatives, steadily increasing pressure on Speaker Nancy Pelosi to begin impeachment hearings, and a collapsing U.S. stock market.
10. When the Democrats look like they will win the Presidency in November 2020, the U.S. stock market will begin to discount sharply higher corporate taxes ahead and also a significant increase in tax rates for the top 1% of wage earners (who are clearly the largest shareholders in U.S. equities). While the Federal Reserve will attempt to cushion any slide in stock prices greater than 20%, the so-called "Powell Put" will be unsuccessful in the face of a Democratic President and Democratic majorities that will almost certainly be won in both the Senate and House of Representatives in the November 2020 election.
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| DJIA Weekly Chart with Computer-generated Buy & Sell Signals |
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| S&P 500 Weekly Chart with Computer-generated Buy & Sell Signals |
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| Russell 2000 Weekly Chart (Non-confirmation of Record Highs in DJIA & SPX) |
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| Treasury Bond ETF (symbol TLT) Monthly Chart |
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| 30-year T-bond Rate Monthly Chart |
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| 10-year T-Note Rate Monthly Chart |
