No U.S. Rate Cut Coming Soon For Stocks

The U.S. Federal Reserve updated us on their monetary policy stance yesterday, in case you had more important things to attend to and did not notice. Of course we do have to pay attention.

In his press conference following the decision announcement, Fed Chairman Powell said that officials did not see a strong case for moving rates in either direction. 

One of the catalysts for the strong stock market performance since the beginning of the year has been the change in Fed monetary policy from one of wanting a higher trajectory for interest rates to a more neutral stance. 

The theme for stock market investors has been that this should continue to help propel stocks to higher levels. President Trump called for the Fed to cut rates by a full percentage point on Tuesday because he equates his success with higher stock prices. It appears that the Fed was able to hold on to its independent decision making methodology, although there is clearly some who think that economic slowing on a global scale and now starting to show up in U.S. economic data, might warrant a rate cut later in the year.

Yesterday a key U.S. manufacturing index (Purchasing Managers Index), usually a leading indicator for future growth, hit a new 2 1/2 year low:

It still begs the question of what we call the fundamental value for stocks which are based on future earnings and earnings per share (EPS). Slowing economies tend not to be favourable for earnings growth and there is nothing favourable about expected future earnings growth.

From the peak in Q3 2018, earnings expectations are showing growth of about a 4% annual growth rate out to Q2 2020. It is hard to see this as a great catalyst for stock prices, which means that with stock prices making new highs, there is growing and considerable downside risk to stock markets (as there was in December) again.

For now it appears that the Fed has removed, at least temporarily, one of the hopes for the stock market bull camp. 

We all love to see stock prices go higher because we all own equities in our portfolios (some more than others) and rising stock prices mean, at least for the moment, higher portfolio values. It is simply the management of our own expectations. We must keep them tied to a sense of reality that more volatility is on the horizon. If you are a long-term investor and are happy to ride out the storm, good on you. 

We at High Rock like to try and add some value to our portfolios (without added cost to our clients) with a more opportunistic perspective of volatility which will let us add to our investments when prices are lower. We also know that there are alternatives to expensive equities and with one of the top portfolio managers in the High Yield space in Canada on our team, it opens up a world of other potential and at the same time helps us to reduce our exposure to risk.