Tom's Roundup - Will the Fed Cut Interest Rates?

Market Commentary by Thomas C. O'Neill, Senior Vice President, Investments, Raymond James

Will the Fed cut interest rates?

The yield on the 10 year treasury has dropped from 3.2% during October 2018 to the current yield of 2.5%. Why? I think two reasons:

• The bond market is very concerned about a slowdown not only here in the USA, but also globally.
• There is about $10 trillion of global debt with negative yields. Both Germany and Japan yields on their 10 year government notes are at negative yields. This means investors would receive less at maturity than the initial investment, essentially losing money. On a comparative basis, our government yields are attractive to buyers.

Inverted Yield Curve – What is it?

An inverted yield curve is when the 2-year treasury yields more than the 10-year treasury. However, that is not the case right now. Normally long term yields are higher. Historically when the yield curve inverts it means the bond market is expecting a slowdown in the economy and a possible recession, and usually a lower stock market.

I expect the Fed to cut rates this year, possibly sooner rather than later. The Fed is our friend for 2019, with the possibility of lower rates and the pause in selling their bond portfolio.

What’s next for the stock market?

Do I expect the stock market to continue at its current pace, up 12.31% for Q1 2019? No. 

Are we due for a pull-back/correction? Yes.

The stock market is a discounting mechanism – it discounts the future. My recommendation to clients is to look for opportunities to buy great companies at cheaper prices over the next few months. For example, the financial/bank stocks got beat up over the last few weeks in part because of the flattening of the yield curve. Some are down 15-20% off their 52-week highs. Many financial stocks’ dividend yields are higher than the 10-year Treasury.

78% of Stocks Hitting New Highs

I follow about 25 technical indicators, mainly Point and Figure technical analysis. This is a math based system that is objective, not subjective. Here’s an update on the point and figure High-Low Index, which I previously mentioned in the first Tom’s Roundup –

During December the High-Low Index reached a low of only 2% of all stocks hitting new highs. Recently the index rebounded sharply to 92%, which points to a very overbought stock market. It has since cooled off to 78% of stocks hitting new highs.

Rule of thumb: when the High-Low index goes below 10%, be an aggressive buyers of equities. When it goes above 90%, be more deliberate and patient in buying.

(Source: Point & Figure-Nasdaq Dorsey Wright.)

PE Ratio Update

PE ratio on the DOW is at 15.6 based upon 2019 earnings estimate. Historically not overvalued.

Any opinions are those of the author and not necessarily those of Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. Investing involves risk and investors may incur a profit or a loss.

The high-low index compares stocks that are reaching their 52-week highs with stocks that are hitting their 52-week lows. The high-low index is used by investors and traders to confirm the prevailing market trend of a broad market index. Inclusions of these indexes is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results.