Stocks moved sideways in listless trading on Friday. Volatility took a distinct move down after an employment report that was generally within the range of expectations. This week will be a quiet one for both corporate and economic news. Earnings season is still more than a month away. September is generally the most important month of the third quarter and it is too early to get any read. While recent focus has been on the outlook for Chinese trade talks, little is likely to happen this week. President Trump could, at any time, suggest talks are progressing or not, but, tweets aside, the real target date for anything substantive is mid-November when Trump and Xi could meet in Santiago, Chile.
Next week is the FOMC meeting. But, aside from Presidential griping about lack of aggressive action to lower rates more than the Fed wants to, the meeting’s outcome is almost a foregone conclusion. There simply isn’t enough economic data for the FOMC to seriously consider a 50-basis point rate reduction at this time, and there is enough consensus to do something that standing pat is unlikely as well. Therefore, expect a 25-basis point cut. As for the future, the Fed will leave options open. Mr. Powell is likely to acknowledge weakness overseas amid a low rate environment. But those facts alone, won’t cause the Fed to move aggressively to match those rates if the U.S. continues to grow 2%+ and inflation remains reasonably close to 2%. The month-over-month increase in wages of over 4.5% announced on Friday alone suggests sufficient inflationary pressure to give the Fed reason to move cautiously going forward. Furthermore, as noted last week, the rather tepid response of mortgage holders to refinance in the current low rate environment supports the conclusion that central banks, by themselves, cannot move the economic growth curve an awful lot. Fiscal policy, which includes, federal spending levels, tax policy, and tariffs, have much more influence. The Fed can try to counterbalance external trends, but, by itself, cannot make the economy grow faster or slower to an appreciable extent.
As for markets, relatively calm amid a market with positive momentum suggests that the path of least resistance remains higher. Stocks could take a run, near term, at record levels which are less than 2% away. One should note however, that typical of a mature bull market, a minority of issues have been doing the heavy lifting lately. The market’s current march toward record highs has been led by an odd combination of safety names (e.g. utilities, REITs, and consumer staples) and a few high growth companies that have persistently met or exceeded expectations. With that said, many of the leaders, Class of 2018, are not the leaders today, including some high profile semiconductor companies and FANG components like Netflix. The performance of recent IPOs has also been mixed with awesome performance by companies like Beyond Meat versus very mediocre performances from Lyft and Uber. In other words, this isn’t a record setting market with broad breadth.
This morning’s big story is a press release from activist hedge fund operator Elliott Management that it has taken a 3%+ stake in AT&T# and wants to meet with management to seek changes. Although AT&T has been a relatively good performer lately, given its very rich dividend yield, it has been a notable underperformer during the post-recession bull market. Its growth numbers have trailed those of competitors Verizon# and T-Mobile#. Its acquisition of DirectTV has been a disaster. The jury is still out on its recent much bigger acquisition of Time Warner. Obviously, Elliott wants to have a major say relative to the integration of that merger. Elliott’s record has been mixed but, in general, when activists have prodded underperforming companies, good things have happened. AT&T’s stock is up about 7% pre-opening. It will be an interesting story to follow, especially during a week without much market moving news.
Today, Adam Sandler is 53. Hugh Grant turns 59.
James M. Meyer, CFA 610-260-2220