The Federal Reserve cut interest rates in its September meeting, but one of Wall Street's biggest bears doesn't think the central bank can do much about what he thinks is an imminent 2020 recession.
What's Happening Now?
The S&P 500 rose 0.15% to 3,011 Thursday, while the Dow Jones teetered around flat after jobless claims rose 2,000 to 208,000 in the week ended Sept. 14, better than economists' estimates of 215,000. The S&P 500 has had trouble moving much past the 3,000 mark. Now, with the Fed not giving strong indications of a second interest rate cut for 2019, the S&P 500 isn't exactly getting a boost.
The Bearish Take
Regardless of how the Fed proceeds, Stifel's Head of Institutional Equity Strategy Barry Bannister sees a recession coming in early 2020. "Too late to avoid recession?" Bannister wrote in a note out Thursday morning. "Even after the Fed's Sept. 2019 rate cut, the policy setting remains too tight." He added that the September 2018 rate hike "has left the Fed unable to normalize without risking recession."
This is generally a position many on Wall Street have begun to take -- the position that interest rates are so low already that further rate cuts can only have a marginally positive impact on the economy and equities. The 10-year treasury now yields about 1.77%, far lower than the 3.2% it yielded in late October 2018 when the Fed was hiking rates as GDP had bumped up against 4% just prior to that (inflation was far below 4%). Now, with decelerating growth and a U.S. and China trade war perpetuating that deceleration, rate cuts will merely "support" equity prices, many strategists have said, rather than "boost" them.
Where Do Stocks Go From Here?
Meanwhile, the S&P 500 is up 20% year-to-date, a gain that was been partially powered by hopes of rate cuts. But in the past week, the gains have been powered by optimism on economic growth, as President Trump and Chinese leader Xi Jinping have demonstrated a more conciliatory negotiating style rather than a punitive one. They'll meet in October. The strong jobs report Thursday didn't hurt either.
These positive points beg the question of whether there will be a second rate cut in 2019, a cut that has a much lower probability than it did a week ago. Many point out that rate cuts are highly dependent on trade talks. "Clearly they [the Fed] will continue to watch incoming economic data and if that deteriorates -- or if the trade war intensifies -- it is likely that they will cut rates later this year," said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance.
Many experts, certainly including Bannister, say stocks have some upside left for 2019, but more downside. Bannister, who has a 2,900 price target on the S&P 500 (representing 3.8% downside), says the current equity risk premium (explained here) implies there isn't much upside for 2019. That premium currently stands at 3.6%, just below the 3.88% since 1925, Bannister points out. Simply put, the potential return an investor can expect in the risky stocks isn't high enough above that of safer treasuries.