Storm Clouds?
Posted on Sunday, July 28th, 2019
Very ,very interesting comments from the Coca- Cola CEO this week. As you know we have been writing that it just might be possible that the approaching storm of recession gets headed off and the global growth slowdown is just that – a slowdown. At least that is how the market seems to perceive it. Perhaps, the Fed rate cut will do the trick next week and the slowdown was more about the fear of a slowdown and trade wars. The CEO of Coke James Quincey had this to say on their earnings call this week.
“We saw some clouds on the horizon, too,” … “But the storm never arrived, so by sticking to our plan, by executing against our strategy, we’ve been able to deliver stronger momentum than even we were expecting.
Quincey went on to say that the clouds are still present but the company is feeling more optimistic about the second half of the year. That is basically how the market is looking from a technical perspective. The internal pressures are building in the stock market and we have been pressing the case that small caps and transportation stocks needed to get going in order for the market to move further north. We got a breakout in Transportation stocks this week. Perhaps next week we will see the small caps break out. The key is going to be the Fed meeting next week. A rate cut combined with an ending of the Quantitative Easing process could propel stocks higher.
Stocks are higher than they should be from a valuation perspective. Since 2014 there has basically been zero earnings growth from the S&P 500 yet the S&P 500 stock index is up 50%. That is all multiple expansion or giving stocks a higher valuation based on the same earnings. Why is that? Monetary policy is responsible for the higher prices as interest rates are the major input to calculate valuations of stocks. Another reason stocks are higher is the two biggest buyers in the market place are price agnostic -Corporate buybacks and algorithms. Neither care what the price is -they just pay it. Lower interest rate most times will equal higher stocks in valuation models. The thing is what if interest rates are headed lower because the economy is headed for the rocks. That is second level thinking but for now stocks seem intent on heading higher. Let’s see what the Fed has to say next week.
The US stock market appears to be breaking higher and we have added back some equity allocation to our more aggressive clients. We are holding our fire until we see the Fed next week and how stocks – specifically Transports and small caps react. All eyes are on the Fed. We had a great week last week as we bolted up to JFK airport to see our lovely Aunt Pat for her 88th and we celebrated my 51st when we got home – A great week and another interesting one ahead.
I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd Blankfein
To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.