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With July Fed Rate Cut Already Priced in, Here's What Could Send Markets Down

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Simply put, this July rate cut is already priced into the market. 

Don't hold your breath, stock investors. The Federal Reserve is almost 100% likely to cut interest rates at the end of July, with the ten year Treasury yield down to 2.05% from 2.75% in March. 

The question on the market's mind now is how many more rate cuts will there be this year, as global economic data, especially manufacturing numbers, continue to come in below estimates. Meanwhile, the S&P 500 is still up 20% year-to-date, and slowing economic growth may continue to serve as fuel for investors' calls for even more rate cuts. 

More Rates Cuts, Please?

"How low will they go?" asked Jason Pride, chief investment officer of Glenmede Wealth Management  which has about $42 billion under management, in a note. "Questions remain as to how much lower the Fed will guide rates."

"Amid weaker manufacturing conditions and lingering trade frictions, the Fed may take a measure of 'insurance' to help protect against relatively unpredictable risks," Pride said. "Officials have noted, however, that an insurance cut may not be without its costs -- lower rates could stimulate appetite for risk, which may threaten to overheat markets at a time when valuations remain elevated." 

Those Valuations

To be specific, the S&P 500 average price-to-earnings multiple is around 17.1, far higher than the 10-year average of roughly 14.8. Earnings growth is expected to be below 3% for 2019, and while it's expected to hit roughly 9% to 10% in the next couple of years, the risks are out there for anyone to see.

The threat of increased tariffs lingers as long as the U.S. and China continue to have a stand-off on required conditions for an agreement. Global economic growth forecasts have continued downward since the end of 2018. The Eurozone leads the way on lowered growth expectations. 

The Post-Crisis Economy and Market 

Mike Loewengart summed up the market's stance for the entire current bull run -- the longest in American history. "It's become perverse," Loewengart told TheStreet. "If we see strong economic metrics that indicate the economy is firming, that's going to be interpreted by investors that the Fed won't have to cut. If there are any metrics that don't drive that narrative, you see stocks come down." 

Since the end of the Great Recession preceded by the 2008 financial crisis, economic growth has been incredibly slow, with GDP growth not having gone above 4%. It's now projected to fall to below 2%. 

"So to the degree that we get a trade deal done with China and expectations of economic growth improve going forward, there is a reasonable probability that investors need to price in a fewer number of interest rate cuts," Josh Emanuel, chief investment officer at Wilshire Funds Management told TheStreet. "And that actually can serve as a headwind to equity valuations in particular, particularly in those parts of the market where valuations are more rich." 

See what the parts of the market are here

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