Why The Stock Market Won’t Crash Yet; Fed Rate Hike, Non-Farm Payrolls; Brexit Loom Large; June Historically Is Worst Month Of Year For Stocks; These Potential Black Swan Events May Threaten World Economy Says Societe Generale
The headline article in this weekend’s Barron’s is “Why The Stock Market Won’t Crash Yet,” and, last week’s stock market rise would suggest that is indeed the case, as the indexes had their best week of gains in months — though volume wasn’t anything to get excited about. For the week last week, the DOW rose 372 points, or +2.1 percent, to 17,873; while the S&P 500 gained 47 points, or +2.3 percent, to 2,099; and the NASDAQ ended the week higher by 164 points, or +3.4 percent to 4,933. For the year, the DOW is +2.57 percent, while the S&P 500 is +2.7 percent, and the NASDAQ is -1.48 percent — though the technology sector of the NASDAQ is now in the green for 2016.
Oil also had a stellar week, as it usually does heading into Memorial Weekend. Oil climbed briefly above the $50 threshold, before closing just shy, at $49.33. Avi Salzman wrote in this weekend’s Barron’s, that “two gauges tracking home sales surged last week. New home sales rose to the highest rate since January 2008; and, contract signings of previously owned homes hit its highest level in a decade,” he noted. “Job growth and fear of higher rents and mortgage rates may be spurring purchases,” said Lawrence Yun, Chief Economist for The National Association of Realtors. “Even if rates rise soon, sales have legs for further expansion this summer,’ he added.
“Durable goods orders also jumped 3.4 percent in April,” according to the Commerce Department, and the Atlanta Fed revised second quarter U.S. GDP growth expectations to +2.9 percent, from its prior estimate of +2.5 percent, according to CNBC. But, these better economic numbers are also increasing the potential that the U.S. Federal Reserve will hike rates at its upcoming 2-day Federal Open Market Committee (FOMC), June 14/15. “There is very little barrier to another rate hike,” said David Stubbs, Global Market Strategist at JP Morgan Asset Management, who does expect a Fed rate hike at the conclusion of the June 14/15 meeting. Still, the betting is the Fed is talking hawkish; but, isn’t likely to actually raise rates. Randall Forsyth wrote in this weekend’s Barron’s that “the probability of a quarter-point boost was only 34 percent at Friday’s close, according to Bloomberg calculations. The odds[of a rate increase] are better than even, 57.8 percent, for a Fed rate hike, at the conclusion of the July 26/27 FOMC meeting,” he added, thinking that the Fed may want to wait till after the June 23, 2016 vote in the U.K. on whether or not Britain should leave the European Union.
This week will bring more Fed rate hike speculation, more Brexit talk, etc.; but, the most important data that will move markets will be the Friday 0830 Non-Farm Payroll number on the number of net new jobs created in the U.S. in the month of May. Expectations are for a number between 160K – 180K.
Why The Market Won’t Crash — Yet
That is the title of the Barron’s feature article this weekend, by Gene Epstein. “Is the stock market headed for another crash?,” he begins. “Of course it is,” he adds. “The moment one crash ends, the market is always headed for another. But, gains in the periods between crashes, tend to last long enough to more than offset the periods of pain when crashes hit. The current period of gain,” he notes, “has lasted more than seven years, and propelled the stock market averages to new highs. But, since the peak in May 2015, the market has faltered, briefly touching double-digit lows early in 2016. Bears have begun to wonder whether the crash to which the market is always headed — is just ahead. Probably not,” he writes. “With rare exceptions, market crashes are accompanied by recessions, and the odds of recession [in the U.S.] are quite low.”
“If a recession isn’t about to happen, and a crash is therefore unlikely, then what’s the outlook for the [U.S.] stock market,” as we head into the second half of 2016, Mr. Epstein asks. “The strongest leg of the bull market is probably over,” he contends. But , he is quick to add that “it could still eke out single-digit gains.” In sum, he concludes, the “odds right now are that the bull market has not [yet] finished its run.”.
June Historically Is The Worst Month Of The Year For Stocks
“Sell in May and Go Away,” goes the theme on Wall Street every year. Except, it doesn’t always work. But, there’s no doubt that June is more often than not, a bad place for investors to be. “Eight of the last ten June’s have been down,” said Michael Browne, Fund Manager at Martin Currie, to CNBC. “It is the worst month of the year in the last decade, not by a little bit — but, by an absolute street,” he added.
These Black Swan Events Could Threaten World Economy Says Societe Generale
The global investment and risk assessment firm Societe Generale, warned in its quarterly outlook published this morning (Tue.), that “risks to the world economy remain to the downside, and include sharply weaker global growth, and a sudden change to expectation’s regarding the U.S. Federal Reserve’s interest rate path. The French banking conglomerate also warned “there is a 30 percent chance of an “economic hard landing for China. The potential for policy errors in China is substantial,” the firm added, “and all the more so since a new bubble appears to be building in the property market,” wrote Patrick Legland and Michala Marcussen, who authored the bank’s latest assessment. “The authorities are clearly keen to start recognizing and tackling the mountain of non-performing loans. The approach will be one of trial and error, with the downside risks implied in the name.”
“A sharper than expected deceleration in the world’s second-largest economy could reverberate around the world,” wrote Kay Barnato on CNBC’s website this morning when summarizing the report’s key findings. Societe General said such an outcome could be termed a “black swan” type event — a metaphor for a surprise event that can have profound negative consequences and be felt on a global scale.
The Top Economic Risks And Their Likelihood Of Occurring — According To The Firm
— Double drag from European policy uncertainty — 40%
— China hard landing — 30%
— Sharp re-pricing of Fed [rate hike] expectations — 25%
— Sharply weaker global growth — 20%
A growing nationalist movement on the European continent, and the looming June 23, 2016 vote in Britain on whether or not to leave the European Union are adding to the uncertainty and increasing the risks (40%) of some kind of major economic drag across Europe, the firm warned.
There is always something to worry about. I do think stocks could be in for a downward swoon this summer; but, the ingredients for a major spiral downward just aren’t present in my opinion. And, the most likely major international event could be an implosion in North Korea — which the bank did not mention. Also, Venezuela continues into chaos, and could cause more instability in Latin America. An Iranian threat to the House of Saud, China’s aggressive stance in the Pacific, and a bold, forceful Putin along NATO’s doorstep are also potential sources for a black swan event — also not mentioned by the bank. And, one of these days, Zika, or Ebola, or MERS, will morph into a global pandemic — which the world isn’t prepared to handle. Oh well, don’t worry — be happy. V/R, RCP