The Fed Blinked First
The stock market cleared a big hurdle this week when the Federal Reserve blinked Wednesday.
Wednesday’s FOMC policy meeting featured an abrupt about-face, which is music to investors’ ears!
In an epic reversal, the Fed confirmed the current interest rate tightening cycle is officially on pause, and perhaps over. Fed chief Jerome Powell declared the Fed would be “patient” about raising rates due to “global economic and financial developments.”
In plain English, he’s talking about the 20% drop in the stock market at the end of 2018. That spooked the Fed, as well it should.
That’s why the about-face on interest rates is no surprise to me.
The biggest loser this week was the U.S. dollar, which plunged to the lowest level since September. With interest rates lower for longer, the buck loses some luster compared with other currencies.
This especially compared with the ultimate real currency: gold.
Gold was among the biggest winners post-Fed announcement, along with other commodities and emerging stock markets.
Markets 1, Fed 0… but Now What?
Next up, in order to fulfill my expectations for 20–30% upside for stocks this year, investors must navigate earnings season.
If you’re skeptical about my forecast of a 20%-plus rise in the stock market, try this on for size: Gold could easily top $1,500 per ounce while gold mining shares perform even better.
As for emerging markets, I would not be surprised to see them up 30%-plus this year, because they are both cheap and out of favor right now.
As for earnings season. So far so good.
By the end of next week about half of S&P 500 companies will have posted fourth-quarter results.
In aggregate, companies are reporting profit growth of 11% year over year and are beating estimates by about 3% on average.
If this trend holds, it will be the fifth-straight quarter of double-digit profit growth for the S&P.
The caveat is 11% growth is good but not as good as the 20%-plus profit growth recorded earlier in 2018.
Some doom-and-gloomers will happily point that out. Pay them no mind.
A Profit-Growth Slowdown Is Hardly a Slump
Sure, there have been some high-profile disappointments. This includes Dow heavyweight Caterpillar (NYSE: CAT) and tech darlings Apple (NASDAQ: AAPL) and Microsoft (MSFT).
But there have also been some excellent results from fellow Dow blue chips like Boeing (NYSE: BA).
The next two weeks’ worth of results and Wall Street’s reaction to those results will be key.
Sectors leading the profit growth parade include: energy, up 73%; industrials, up 17%; and communications services, up 13.7%.
Conspicuously absent, is technology, with average earnings growth of just 4%.
Several tech heavyweights including AAPL, MSFT and Nvidia (NASDAQ: NVDA) have disappointed, which is troubling for the sector.
One of the biggest profit surprises so far includes the consumer sector, which posted average earnings of 8.9% above estimates. This thanks in part to big positive surprises from Starbucks (NASDAQ: SBUX) and Nike (NYSE: NKE).
In second place is the industrial sector with an aggregate 8.1% earnings beat rate, thanks in part to United Technologies (NYSE: UTX) and JB Hunt Transport (NASDAQ: JBHT).
Moving forward commodities and emerging markets have the best upside prospects right now.
But if you prefer to play domestic markets, the stocks and sectors mentioned above are certainly ones you should consider.
Especially if you want to capture your slice of the next 20%-plus move in the S&P 500!
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch
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