The Daily Prophet: Stock Traders, Take the Rest of the Year Off
The Standard & Poor's 500 Index reached a milestone Friday when a late burst propelled it just over the 2,500 mark for the first time. Although it held those gains Monday, bringing the year-to-date increase to 11.8 percent, the best and brightest on Wall Street, whose jobs are to make public prognostications on where the benchmark is likely to go, would have a less than technical term for their outlook on stocks with more than three months still left in the year: dead money.
That's because the median estimate of almost 20 strategists surveyed by Bloomberg is for the S&P 500 to end the year at 2,500. Count Goldman Sachs among the firms not willing to boost their forecasts with the Federal Reserve poised to begin the process of shrinking its $4.47 trillion balance sheet next month, which may lift the term premium of Treasury yields and hence deflate equity valuations, according to Bloomberg News' Michael Regan. The chief investment strategist at Bank of America Corp.’s Merrill Lynch unit, Michael Hartnett, wrote in a research note that all the money the Fed has pumped into the financial system is akin to a "liquidity supernova." Goldman Sachs' year-end S&P 500 target is 2,400, implying about a 4 percent drop from current levels, while Bank of America's forecast is 2,450.
The views of the Wall Street strategists contrast with retail investors, who are the most bullish on the U.S. stock market in at least 15 years. Respondents in the latest University of Michigan survey of consumer sentiment said there was a 65 percent chance that $1,000 invested in a stock fund today will have appreciated in a year’s time, according to Bloomberg News' Vince Golle. Although at 19 times forecasted earnings, the S&P 500 is trading at the most expensive level since the dot-com era, quarterly profit just had the first back-to-back gains exceeding 10 percent since 2011 and analysts expect companies to sustain that level of growth every year through at least 2019, Bloomberg News reports.
BOND TRADERS STOP FIGHTING THE FED
It's not that economic growth is going gangbusters, or that inflation is busting out, so what has bond traders suddenly so jittery? After touching a year-to-date low of 2.01 percent on Sept. 8, yields on 10-year U.S. Treasuries have shot up, reaching 2.23 percent on Monday. Tthe strategists at Brown Brothers Harriman say one explanation could be the Federal Reserve's increasing focus on easier financial conditions despite the rising federal funds rate. With policy makers due to announce their latest plans for interest rates and the balance sheet on Wednesday, the easing of financial conditions likely means the Fed understands the need to sound a hawkish tone. "Its institutional credibility is being challenged in a way vaguely similar to what" former Chairman Alan Greenspan "called a 'conundrum' in 2005," the Brown Brothers strategists wrote in a note. Commodity Futures Trading Commission data show asset managers slashed their long position in 10-year futures by 114,832 contracts in the week through Sept. 12, the biggest reduction since January. That left them net long by about 45,000 contracts, the least bullish stance on the maturity this year, according to Bloomberg News' Brian Chappatta and Edward Bolingbroke.
DOES THE FED EVEN MATTER?
Imagine a world where the Fed raises interest rates and money gets easier and cheaper to attain. That's no hypothetical scenario -- that's reality. Despite the Fed boosting its target for the federal funds rate four times since December 2015, to 1.25 percent from 0.25 percent, the Goldman Sachs U.S. Financial Conditions Index has dropped to its lowest level since 2014 (the gauge drops as financial conditions get easier). This is why many economists and investors believe that policy makers this week will reiterate their forecast for another rate hike before the year is out despite the slowdown in growth and inflation. Indeed, more Fed officials tried to get the markets to believe that this new "third mandate" is necessary to forestall bubbles in stocks and real estate -- never mind that such a focus implies that a few central bankers know better than professional investors when financial assets are cheap or expensive. "The truth is, if the Fed is met with a situation where inflation is below target but steady (even at 1.5 percent), all the while financial conditions continue to ease in the face of monetary policy tightening, they are probably more than willing to continue raising rates at a gradual pace," Tom Porcelli, the chief U.S. economist at RBC Capital Markets, wrote in a research note.
POUND TRADERS LEFT WANTING
The way sterling has rallied lately, anything less than a declaration Monday by Bank of England Governor Mark Carney that he guarantees an interest-rate increase the next time policy makers meet would have been a disappointment to traders. After rising more than 5 percent the last week three weeks, the Bloomberg Pound Index fell the most since Aug. 3. Although Carney acknowledged the need to raise rates, he also tempered his comments by saying any increases would be limited and gradual and that the global equilibrium real rate may be rising, according to Bloomberg News' Charlotte Ryan and Anooja Debnath. “Is Carney already beginning the great rate expectations row back?” said Jeremy Stretch, head of Group-of-10 currency strategy at Canadian Imperial Bank of Commerce in London. “Ahead of key data such as retail sales, the comments may leave some a little wary of immediately jumping upon the November BOE hike bandwagon.” The market is pricing in a 73 percent chance of a rate increase in November.
WARM WEATHER FORECAST NURTURES NATURAL GAS BULLS
There's been much focus in recent weeks on the gyrations in the oil and gasoline markets brought on by Hurricanes Harvey and Irma, but don't ignore natural gas. Price in that market have jumped to a three-month high as forecasts showed lingering warmth in the eastern half of the country, according to Bloomberg News' Emma Ockerman. U.S. temperatures may be above normal in the Midwest, Northeast and South from Sep. 23 through Sept. 27, according to the Weather Company. Chicago’s could climb to 87 degrees Fahrenheit (31 degrees Celsius) on Sept. 24, 15 degrees higher than average, data from AccuWeather show. Unusually hot weather in the nation’s major gas-consuming regions is prompting homes and businesses to crank up their air conditioners, boosting demand for the power-plant fuel at a time when seasonal demand typically declines. The warm spell could limit gains in gas stockpiles just before the winter, when consumption peaks. the U.S. Climate Prediction Center raised the odds last week for La Nina, a weather pattern that can bring cold winters to parts of the northern U.S and boost gas demand for heating. There’s a 62 percent chance of the phenomenon arriving between November and January, up from 26 percent last month.
U.S. President Donald Trump will address the United Nations for the first time on Tuesday, the same institution that he called a “club for people to get together, talk and have a good time” after his election. Perhaps the market with the most at stake from the speech is precious metals. Gold has dropped from its recent high of more than $1,360 an ounce earlier this month to about $1,312 on Monday as Trump deferred to UN sanctions against North Korea in response to its nuclear missile tests rather than raise tensions further by having the U.S. react unilaterally. That lessened the demand for haven assets such as gold. Naeem Aslam, the chief markets analyst at Think Markets U.K., figures gold could get a boost if Trump takes the UN to task for not adopting harsher sanctions against North Korea and threatens to have the U.S. take matters into its own hands. Gold could also benefit if the UN acquiesces to the Trump administration's demand for harsher sanctions because it might trigger more missile tests by North Korea, Aslam wrote in a research note.
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