Auto companies including Ford and GM were trading higher, breathing a sigh of relief, as supply chains now won't be disrupted. This follows Friday, when once again bad news became good news as traders jumped all over the Labor Department’s weak employment report, firm in the belief that the Fed will respond with its first rate cut since the depths of the financial crisis.
|FORD MOTOR CO.
|GENERAL MOTORS CO.
After 9 consecutive hikes starting in 2016, markets around the world have forced the Fed to rethink policy. Last Wednesday's ADP data gave investors their first hint that Friday's employment report might disappoint. Non-farm payrolls coming in at just 75k -- well under the 185k expected -- triggered a knee-jerk reaction lower that was quickly faded as investors scooped up shares for the remainder of Friday's session. Bulls went into the weekend smiling on the heels of the best week for stocks in 2019.
Don't fight the Fed
In past battles investors have been forced to learn the lesson "don't fight the Fed." Nevertheless, it begs the question are low rates enough to support a market that once again is less than 3 percent from another all-time high? Multiple expansion on its own isn't going to get us to the promised land.
In the end it comes down to improved economic activity, earnings and cash flow to drive equity prices higher. After all, just what does a stock certificate represent? Stocks are a contract between the company and the shareholder giving those same shareholders their pro-rata share of the earnings and in turn dividends of the company. Even if we break to new highs confident the Fed has our back, I doubt we can maintain altitude unless we refuel.
Data from last week showed earnings estimates for 2019 took another step lower. This is a picture that has continued to deteriorate since September last year. At the very least I need to see this bottom before I can say the coast is clear. Add the fact that the rest of the world is in an economic malaise held up by negative rates and the picture gets a bit darker.
'It ain't over till it's over'
Mr. Berra had a lot of wisdom to share and maybe the most useful for investors is his comments during the 1973 pennant as he guided the Mets to the World Series. "It's not over till it's over." It's a wonderful story and maybe a phrase we can utter in the face of any hardship but it's important to remember the following: the Mets LOST.
David Nelson, CFA is the Chief Strategist of Belpointe Asset Management.