The market sell-off is fashionably late. But it is coming. Consensus now has a nearly 100% odds of a rate hike next week. It’s going to be a sell-the-news moment.
The trading range for the S&P 500 has been tight even as the market prices in higher interest rates. That’s usually a sell signal. Even so, we know the market is not all that worried about a 25 basis points rate hike, says Arne Espe, a fund manager with USAA in Texas.
“At this point, the only thing we can envision delaying action next week is a monthly employment report on Friday that’s shockingly poor,” Espe said of today’s Department of Labor figures. The odds of that happening fall between slim and none, given Wednesday’s buoyant private-sector jobs numbers from ADP. “We don’t see a recession between here and the horizon, but there are numerous reasons we think investors should consider some caution ahead,” Espe said.
The most obvious reason is price. U.S. equity valuations are pretty rich. The S&P SPDR (SPY 515,71 +2,85 +0,56%) has lost some of its momentum, but is still about 10 points over its 200 day moving average. Corporate revenue and earnings growth have been picking up in the past two quarters, but nearly all of the recent stock market gains have come as a result of demand from equity investors driving up stock prices.
For now, the market seems to be “all in” on Trump’s promises of fiscal stimulus and regulatory rollbacks, while discounting possible negative outcomes like trade disputes with Mexico and China, and lackluster reforms in Congress. Think of the recent change to the Affordable Care Act for example. Most people on Wall Street believe that is dead in the water in the Senate. But big picture analysts will tell you that this may be one way to just get the ACA off the table for now and move to tax reform. That’s not expected until after August. Expectations may get tempered by then.
Meanwhile, these higher expectations are pushing investors into buying at the top of the market. Advisors may want to proceed with caution until the Fed is done and maybe even after the elections this month in The Netherlands.