This week could certainly be a volatile one.
The major players in the market are back at their official trading outposts after sipping rare wine in the Hamptons -- where their unofficial trading outposts exist.
Companies are on the investment banking speaking circuit, pleading their cases to inquisitive investors. Thus far in their presentations, I have liked what I heard from a macro standpoint: guidance reiterations from the likes of PepsiCo (PEP) and Action Alerts PLUS portfolio holding Mondelez (MDLZ) have been encouraging. But hedge fund managers being back to the minting money grind and self-serving execs extolling their wisdoms ultimately take a backseat to two events this week: the Fed meeting and Republican debate.
Here is how to be thinking about both of these spectacles.
The more I thought about it this past weekend, the more I realized it was unlikely the Fed would lift rates at its upcoming meeting. Based on the events in China and the equity markets the last month or so, we could be headed for a short-term rough patch for the job market (as in 150,000 to 200,000 jobs created a month, below the year-to-date trend). The Fed will not want to make that worse by lifting rates before the holiday season. After all, it could be argued the Fed's increasingly hawkish stance throughout the second quarter was a key driver in the market's volatility.
So let's assume no rate increase. What happens next? First, in not raising rates, the Fed will have sent a signal to the investors that it's concerned about the pace of growth for the balance of 2015. The market will likely read it as the Fed thinks China's slowdown is gathering steam, rather than stabilizing as has currently been the rising sentiment. The market will further be concerned about low inflation, and the implications it has on third-quarter earnings (low inflation stemming from the dollar's resilience, etc.).
Just as the Fed signals that in its press release, out trots Janet Yellen to possibly stick a nail in the coffin of the market with her publicized conference. If the Fed stands pat on rates, Yellen could still sound a little more hawkish, at the same time reiterating her stance the Fed is data-dependant. Yellen knows it's high time to begin lifting rates, and will likely want to do so before 2016 as to not undermine the credibility of herself and governors that have stressed the end to low rates was nearing.
I see two ways to play this craziness:
- Short small-cap stocks: with the Fed sending a signal it's worried about growth, it could mean it's getting reports from across its districts of slowing demand by U.S. companies this quarter. Small-cap stocks are still richly valued relative to the broader market; it's where investors have hidden out in the past month (these companies have lower relative exposure to China, etc.). The sector could come under pressure as investors adjust to the reality the Fed heaves onto our plates.
- Emerging market stocks: low rates have been the fuel for emerging market stocks for the past several years. But with incremental hawkishness infiltrating the Fed, and growth cooling in emerging markets, these stocks as measured by the iShares MSCI Emerging Markets (EEM) hit a peak in Sept. 2014. Since then, the EEM has basically plunged (see chart below). Should the Fed keep rates unchanged at this meeting, emerging market stocks receive short-term certainty their fuel is back for a little while longer. Hence, we could see some bottom fishing in some of the names. I would favor playing the EEM, it's easier to "get" as opposed to digging through SEC filings to learn a company's global exposures. Time is of the essence on these ideas.
Source: Yahoo Finance
Personally, I can't wait to live tweet this one. Even if you think he is a rich, clueless jerk (I don't think that), the reality is that Donald Trump is creating a movement in this country. Read up on how the guy is packing out sporting venues. Trump has said suspect things on the topics of women, Hispanics and generally did the opposite of what a politician running for public office was taught to do inside of the hallowed grounds of Harvard or Yale. Yet, he is trouncing the stiffs in the Republican polls, while at the same time oddly looking like a better option to an under-attack Hilary Clinton.
You may not like the Trump lead, but it's reality, and I think it's something you should consider investing/trading on. A couple of options:
- Defense stocks: under a Trump presidency, you would have to think we get a renewed focus on national defense. That could lift names such as Trifecta portfolio holding Boeing (BA) and General Dynamics (GD). I think the easiest way to play this is through the iShares Aerospace and Defense ETF (ITA).
- Wal-Mart (WMT): I have been very bearish on Wal-Mart shares; I think the business model is slowly falling apart. A Trump presidency could be a negative to Wal-Mart, and I would consider a wager against the world's largest retailer (if not having one already based on my advice). First, Trump's harder line on immigration will remove a cash-spending portion of Wal-Mart's customer base. It could also hurt its access to cheap labor in its stores, forcing it to lift wages even more to keep existing workers. Trump is also likely to make it tougher for big businesses to prosper in China, where Wal-Mart is trying to improve its results.