Well, folks, the Federal Reserve finally did it: they slashed key interest rates. For those who missed it yesterday, the Fed announced that it was cutting key interest rates by 25 basis points – the first time in almost 12 years.
Now, this is something I’ve been expecting for a while, and something we’ve talked about many times before.
The Fed cited three reasons for the rate cut: Global growth concerns, slowing business investment and muted inflation. Regarding global growth concerns, China’s Purchasing Managers’ Index (PMI) has been negative these last couple of months and Europe has slowed down, too. The British pound hit a four-year low and there are concerns that Brexit, which is still expected to happen on October 31, will be messy. So, there’s a lot of uncertainty there.
As for business investment, it slowed dramatically in the second quarter. This is one reason why GDP wasn’t strong. Ironically, though, the strength of the U.S. economy is consumer spending, which has been much stronger in the second quarter than the first. In fact, consumer confidence is at an 18-year high.
The last reason is the most important. You see, the Fed was expecting inflation to accelerate, but it decelerated instead. This was due in part to the strong U.S. dollar shoving down import prices and being energy independent. The world is awash in crude oil, so we’re in peak demand. However, I expect that demand will drop in September, which will weigh on the energy sector.
Now, there were some interesting reactions following the announcement. The most interesting was the U.S. dollar. The Fed cut rates, and it took off. However, that’s not how it usually works. Normally, when a country cuts rates, the currency weakens. But given the weak British pound and euro, the 10-year U.S. Treasury might hit 1.8%. Currently, it’s hovering just below 2%.
The stock market also sold off on the news, with the Dow at one point down more than 300 points. This is interesting because the Wall Street wanted a rate cut, but it’s not uncommon to see some market gyrations following the Fed, so I’m not concerned one bit.
Fed Gives the Green Light
In fact, the market is a screaming buy right now. The S&P 500 yield is close to the 10-year U.S. Treasury. This year, the market has been driven largely by falling interest rates, so folks are buying stocks for dividend yields.
And while the second-quarter earnings season has been lackluster (but not for my Growth Investor stocks!), they’ve still been better than expected. About half of the S&P companies have reported now, and this quarter sales are up 3.6% and earnings are up 5.2%. Remember, analysts were expecting earnings to come in negative. There are also a lot of stock buybacks from big-name companies like Apple (AAPL) and Google (GOOGL) that are taking advantage of the low interest rates to buy back outstanding stock.
But beware August news.
August is my least favorite month of the year.
It’s not the oppressive heat in August that causes me to sweat. Rather, it’s the fact that most of Wall Street and Europe jet off on summer vacations in August, leaving the stock market subject to unscrupulous short sellers and “air pockets” that can cause stock prices to fall in a low liquidity environment.
In addition, there are fewer and fewer stocks that are still able to sustain strong sales and even stronger earnings. And, as the second-quarter earnings announcement season winds down, I expect market leadership to grow even more narrow.
The good news is that if you’re invested in stocks with strong fundamentals, sales and earnings growth, then you should come out of August relatively unscathed. Like my Growth Investor stocks, for example. They are benefitting from wave-after-wave of positive second-quarter earnings and sales announcements.
While the S&P 500 is still forecast to post an earnings decline of 2.6% and revenue is only expected to grow an average 4% for the quarter, my Growth Investor stocks are poised to do significantly better. They are characterized by 16.3% annual sales growth and 64.6% annual earnings growth.
As of this writing, out of the 40 Growth Investor companies that have reported so far, 35 have crushed analysts’ forecasts! And several have hit new 52-week highs post-earnings, including MasterCard, Inc. (MA), Atlassian Corp. PLC (TEAM), Twitter, Inc. (TWTR) and DexCom (DXCM). Clearly, my fundamentally superior Growth Investor stocks still remain an oasis in an increasingly chaotic environment for the S&P 500.
There are two stocks in particular with earnings around the corner that are set to explode on their results. I’m especially excited because they’re smack dab in two of the hottest industries right now – 5G and artificial intelligence (AI) – so I’m expecting stunning earnings results given their big growth potential. Sign up now for all the details and to claim your two free reports, The #1 Investment for the Coming 5G Revolution and The A.I. Master Key.