Broker Check

Gimmie Two Names

A little tongue in cheek but we are in this weird period of time when stock market sentiment is largely driven by two names: Trump and Powell. President Trump of course has his thumb (up or down) on trade success with China and Fed Chairman Powell has investor’s attention as bond market fortune tellers claim the Fed will cut interest rates this year and may cut even more if conditions warrant. Aside from these two headline grabbers not much else really matters for the short term as investors wait for July quarterly numbers for real data to put into their calculation about strength of their operations and management’s forecasting ability.

Yes, a few merger announcements may attract some attention like last week’s big defense combination between UTC and Raytheon and today’s announcement that Pfizer is buying Array Biopharma for $10.6 billion to attain a pipeline of cancer compounds. It makes sense to me that mergers are now happening as the acquiring company typically has a high stock price and strategic rationale both offensively and defensively makes combinations like the UTC/Raytheon deal possible. Selfishly, I would like to see the Pfizer/Array announcement put a little zip into other biotechnology companies that could be prime candidates for takeovers. Let’s see what happens over the next few weeks but it wouldn’t surprise me to see other merger announcements in other sectors for strategic reasons.

Back to Trump and Powell for a minute. Maybe it is not all bad that we as investors really just have to keep in mind that these two men control the short term sentiment of the market. Think about it. Powell and his committee members have been telegraphing pretty loudly that the Federal Reserve is concerned about the strength of the global economy and not seeing any meaningful signs of inflation in its economic data. Therefore, the Fed’s mindset is already pointing toward easing rates; particularly since the 10 year Treasury bond is trading at a low yield around 2.10%. So basically, the Fed is likely to keep interest rates lower for longer and less likely to surprise to the negative like they did last December. That’s a definite plus for investors.

Possibly a harder call is what surprises will President Trump give the market as we march toward the all-important G20 meeting later this month. Maybe I am simplistic here but I can’t see any way Trump will just turn thumbs down on any future trade deal with China without some handshake from the two leaders that some progress (real or imagined) is being made and future negotiations will continue between the two nations. A handshake is not a deal but that might be enough for the stock market to keep its positive edge into the second half of the year.

I think the backdrop to the market is pretty tasty from the standpoint of picking up good companies on sale as volatility picks up on short term jitters from the two names we cannot escape. I plan to make the best of it and buy high quality stocks at huge discounts and fortify portfolios for the long term.

Have a great week, 

Roger N. Steed

June 17, 2019

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