Forget about selling in May and going away. If you’re the kind of person who tries to rotate in and out of the market, the next six weeks will probably test your patience, your nerve or both.
After all, earnings season is formally over now. Just about every company on Wall Street has shared its numbers and its outlook. While there are a few reports left on the calendar, there aren’t enough to bend my statistical sense of where corporate America is going.
That’s why it’s time to share my strategic take on what we’ll see between now and the end of the year. What I told Reuters last week was only the first step. (Watch the video here.)
Conditions aren’t spectacular, but they aren’t bad either. Investors who were steeled to see as much as a 3 percent earnings deterioration at the end of June were wrong.
However, while none of the doomsday scenarios played out, there’s little fundamental reason to pump fresh cash into the stocks either. Until growth picks up again, the same stocks will be available at similar valuations months from now.
We won’t get our next read on the fundamentals until mid-October, so those valuations aren’t getting any better unless stocks drop hard. More likely, they’ll go nowhere in the absence of either a strong sell or buy signal.
And all the big signals are already on the board. A sudden breakthrough on trade might get Wall Street to shake off the sense that a recession is imminent. Even then, it will take time for the fundamentals to back the bulls up.
So, we might see a relief bounce any time: pleasant, but transitory. Something more sustainable will need to wait until at least October to confirm that it’s more than just another mood swing.
The good news is that we’ve also felt the shock associated with the maximum trade war escalation and now know exactly how far down a complete Chinese embargo can take the S&P 500. It is going to take a lot of turmoil to push stocks below the worst levels of the summer.
Weighing the Fed Factor
We also now roughly know what a rate cut is worth in a trade war environment. When the news flow is at its most negative, it’s about 3.5 percentage points on the S&P 500.
That’s the amount of space separating the May bottom from what we’ve seen more recently, when the trade headlines swung back from hope to total gloom. The corporate outlook didn’t change.
The only difference came from the Fed’s admission that raising interest rates in the absence of inflation was a mistake. Now that mistake is being corrected and stocks get more room to run every time the Fed retreats.
Most investors are convinced that interest rates will drop another 0.25 percentage points on Sept. 18, the next time the Fed will meet to set monetary policy. Working from the economic environment we have, that’s enough relief to push the S&P 500 floor above 2,900 and the ceiling to within sight of 3,150.
Of course, stocks probably won’t soar to that record peak immediately. Because Wall Street already anticipates that second rate cut, its impact is already priced into asset prices.
And because the mood among investors remains a little brittle, our strategic targets need to account for mood swings.
When the world looks good and people look forward to the future, a more relaxed rate policy lifts the ceiling. On the other hand, when tariffs are stacking up and people are whispering about a recession (which I don’t believe in right now, by the way), the Fed provides enough comfort to raise the floor.
Between that ceiling and floor is where sentiment cycles are moving towards, taking asset prices along for the ride. However, the most upbeat mood isn’t going to raise the S&P 500 ceiling much more than 3,150 once the Fed makes its play. It’s going to take a lot of gloom to push the index below 2,900.
Barring a miracle or disaster, that’s where the market will go in the next three weeks. It might look like minimal progress for investors who have been holding onto S&P 500 index funds over the last year, but Wall Street usually works in cycles, not straight lines.
The Strategic View Moving Into 2020
People who kept their nerve in last year’s precipitous 20 percent retreat, May’s 7 percent shudder and the current shakes have been compensated by slightly bigger rallies and new records in between. They’re making as much as 9 percent a year between the downswings.
But you need to keep cool in order to enjoy that return. Investors who locked in the losses are still trying to catch up. Tactical traders like us, meanwhile, have had the opportunity to make more money simply by locking in profits and buying stocks that were rebounding after dips.
Let’s use the S&P 500 cycling from 2,900 to 3,150 as an example. Index funds that mirror that move make close to 9 percent. If that move takes a year, that’s the annualized rate of return.
However, that journey contains plenty of smaller opportunities to capture almost as much profit in a much shorter period of time. Carving upside out of the good parts of the year lets us reach for bigger returns.
And always remember that index fund investors are trapped. They can’t pick stocks that are obviously rounding the bottom of their cycle while ignoring those that are equally obviously getting stuck. That’s what we can do. We focus on the most dynamic stocks around, skipping the rest.
Of course, my subscribers already know what that entails. If you’re not actively choosing stocks for your portfolio, I hope you’ve found some other solution to keep the money flowing when the market as a whole has run out of room.
Right now, of course, the market as a whole has the Fed on its side. Between earnings, rate relief and the lingering buzz of lower tax rates, active stock pickers can have a great time in the next few weeks, even if index funds don’t raise the bar too far into record territory.
From there, of course, things get interesting. The October earnings season is unlikely to give us a lot of upside surprises, so that fundamental picture is already factored into my target for the S&P 500.
The quarterly cycle after that, however, could finally end the earnings stall and get growth flowing again. We’ll start seeing those numbers in January.
By that point, I’m thinking the Fed realistically could take back 1-2 more rate hikes for a total of 0.75 percentage points of relief. Add in at least a trickle of earnings growth and the S&P 500 floor climbs above 3,100.
A breakthrough on Chinese trade talks raises the bar even higher. At this point, I’m not going to speculate on when it will happen, but one way or another, we’ll get clarity before the end of next year.
We don’t even need that diplomatic victory for stocks to keep climbing. Catch investors in a great mood six months from now and the S&P 500 can test above 3,300.
Investors see the glimmerings of that future now. Based on the cards currently on the economic table, it will arrive within the next year. All we need to do is stay focused.
And if you’re looking to keep money flowing when the market is going sideways, my 2-Day Trader has started with a bang.
Subscribers there have booked nine winning trades in a row, booking an average of 13 percent profit per position . . . with most of those positions paying off in a matter of hours.
The S&P 500 dithered through that period, leaving index fund investors down 1.7 percent. I’m thrilled.
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Join me at The MoneyShow Philadelphia!
The MoneyShow is heading to Philadelphia for the first time ever and I’m excited to join some of the country’s smartest professional investors and traders at this complimentary, three-day event, Sept. 26-28.
I will be analyzing sectors and trends, as well as sharing with you time-tested strategies for profiting in the markets. I also will be joined by investing experts such as Bryan Perry, Bob Carlson and Dr. Mark Skousen in discussing stocks, exchange-traded funds (ETFs), income investing, real estate investment trusts (REITs), commodities, trading strategies and much more!
To register, click here or call 1-800-226-0323 and be sure to mention my priority code of 048290 to receive complimentary admission.