Stocks have had a good start to the second quarter after a monster Q1 that saw major indexes pushed to within range of record highs.
But Gina Sanchez, CEO of Chantico Global, warns that investors should be cautious.
“We’re back to the level as if the December decline never happened and I think what’s interesting is what’s pushing that is the Fed has decided to not hike for the rest of 2019 and only once in 2020,” Sanchez told CNBC on Monday. “Now that is a double-edged sword, that’s a canary in the coal mine.”
The Federal Reserve hiked rates in December, and at the time had projected two rate hikes for 2019. The Fed then turned dovish at its March meeting, signaling no rate hikes for 2019 and just one for 2020 and revised its economic outlook for GDP for 2019 down to 2.1% from 2.3%. While a dovish Fed spurred excitement in the market, Sanchez says the Fed’s about-face is a warning sign of an impending slowdown.
“Look at economic surprises that are deeply negative right now, economists continue to ratchet down their expectations for growth in 2019 and growth in 2020 and we did see the yield curve flashing a negative sign,” she said.
However, Sanchez says investors still may see some upside in the near-term.
“Earnings are still cycling high because of the tax cut,” Sanchez said. “That will buoy the market for some time but I think at some point we’re going to have to face the fact that we’re on the back end of this extension of the markets and we’re headed for a downturn at some point, but this rally could continue for a couple of quarters.”
JPMorgan’s Adam Crisafulli believes the market may be approaching a near term top as the consensus earnings estimate for 2020 has ticked down to between $181 and $182 per share, down from about $185.
Such an earnings estimate puts the S&P 500 to about 2,900, “and that should be thought of as a ceiling for the time being,” Crisafulli wrote in a note to clients. “It’s not clear if improved growth will simply stabilize [the earnings estimate] at these levels or push it back up by a few dollars.”
Earnings growth expectations have been falling over worries about an economic slowdown, and the ongoing trade dispute between the U.S. and China, though negotiations between the two countries appear to be progressing. Some economic data is also improving, with manufacturing activity in China reaching its strongest level in March in eight months, and rebounding from its lowest level since November 2016 in the U.S.
“If investors recapture just some of the economic optimism from Jan and Feb about global growth inflecting higher exiting [calendar first quarter] and continuing into [calendar second quarter]… it will be extremely beneficial to stocks in the near-term and should significantly undercut the recent bond rally,” Crisafulli wrote. “If bonds see sustained selling, this will bolster financial equities (and cyclicals more broadly) in the days and weeks ahead.”