Figuring Out The Fed - SPDR S&P 500 Trust ETF (NYSEARCA:SPY)

We ask our macro-focused Marketplace authors whether that is the case and how they are positioning in the current environment.

The first half of 2019 saw a lot of green in the markets, as broader indices recovered from the brief bear market in the second half of 2018 and returned to new heights. Despite that, the wall of worry continued to grow, even if the specific concerns changed. Instead of a rising rate environment, expectations have shifted to a possible rate cut even with good job numbers. Geopolitical flashpoints have (re-)emerged in Venezuela, Iran, and in the ongoing China-US trade conflict. European economic growth appears to be slowing, and nobody's quite sure where we are in the US cycle. Oh, and another presidential election cycle is beginning.

So what to make of this all? We decided to take the temperature of the markets with a midyear Marketplace Roundtable. We asked our Seeking Alpha Marketplace contributors - authors who run investing services and provide ideas and guidance to members about how to think about the markets or at least certain parts of it - to share their views on the current climate and how they're positioning as a result.

Over 55 authors participated in our survey. We've grouped their responses into several categories, ranging from tech to commodities, biotech to dividends and income investing. We're going to share their responses in those grouped categories over the coming week or so. Each discussion will have two common questions about the market as a whole, two sector-specific questions, and a round of current favorite ideas. We hope you enjoy the discussion and welcome you to join with comments on these issues or on any key points that didn't come up, or follow-up questions.

Today's edition is focused on the macro environment. We invited macro specialists, market generalists, and a couple sector experts who related the environment to their sector, to weigh in on the economy, the Fed, and their favorite ideas. We should note - questions were sent out before the June jobs report or Fed Chair Jerome Powell's most recent congressional testimony. Our panel:

Please check the end of article for disclosures - authors disclosed positions based on stocks they respectively discussed.

Avi Gilburt: The market will always have doubt. That is why they say that bull markets climb a wall of worry. And, I still think we have much further to climb over the next 3 years. But, I also expect more of a swoon to the market in the coming months before we continue much higher.

Eric Basmajian: No. When talking about the "market", most discussion defaults to the equity market. The bond market is increasingly concerned about the global economic outlook relative to the start of 2019. The bond market expects 3-4 interest rate cuts from the FOMC in the next 12 months as compared to just one at the start of the year. Yield curve inversions have deepened and the 10-year Treasury rate hovers near 2.0%. The bond market is worried about the global economic slowdown that has actually intensified in recent months rather than subsided. A long position in Treasury bonds has been more profitable than most equity sectors year-to-date.

ADS Analytics: In our view, the only thing that is resolved is the Fed's stance on monetary policy. The December market sell-off pushed the Fed to capitulate on its 'auto-pilot' balance sheet run-off as well as the expected trajectory of hikes. And while other risks such as the trade-war and global slowdown remain, the market views the Fed as willing to do whatever it takes to keep the party going. This one-man show makes the market particularly fragile at a stage when the economy is late-cycle and valuations are on the richer side.

Anton Wahlman: Not at all. Many of the core fundamental indicators, such as rail traffic, capex, exports, and general PMI data, are all down a lot. That almost guarantees a recession is imminent.

Howard Jay Klein: My sense is that we could be headed to a slowing pace of valuations as many sectors are beginning to feel toppy. I would think we might be looking at somewhere around a 12% upside till the end of the year with a possible mild correction in such sectors.

D.M. Martins Research: The markets have been and will likely remain jittery. A quick step back reveals that equities have scrambled to find a north in the past 12 months -- producing satisfactory returns of 9% in the end but in highly volatile fashion. Expectations on the direction of monetary policy shifted quickly when, just recently, very few projected interest rates to head back down. Meanwhile, trade policy continues to be impacted by the most recent news of the week -- the short-lived Mexico scare being an example. I believe stocks could continue to endure a bumpy ride in the second half of the year and into 2020, particularly if the Fed does not deliver the two or three rate cuts that the market expects over the next several months.

B&B Market: I do not believe that the doubt is resolved as the issues mentioned have not been resolved as of this writing. Rather, I think they have been postponed. The market rally is reflecting a 'business as usual' mindset while the uncertainty continues. There have been positive signals, the recent jobs report for example, along with the perceived backtrack by the Fed which is a positive for stocks. Trump appears to have transitioned to an easier attitude in regards to the trade war but it is unclear where this will lead.

Eric Basmajian: Global economic growth has continued to decelerate through the first half of the year and now into the second half of the year which is causing the hopes of a "second half" rebound to fade. The bigger change is that the leading indicators of inflation have moved notably lower which is causing inflation expectations to decline and the move lower in bond yields to accelerate. For most of 2018, the domestic economic environment was one of growth slowing but inflation expectations rising. Today, as we move into the second half of 2019, the environment is one of growth slowing and inflation expectations slowing. This is occurring in Europe as well which accounts for the more rapid decline in bond yields globally. This will also force more dovish monetary policy should the leading indicators of growth and inflation continue to point lower.

Anton Wahlman: It's been getting worse almost every day. Politicians keep hitting up automakers for fuel, emissions and CO2 standards that are extremely costly to implement and are guaranteed to shrink the size of the car market and profit pool.

Howard Jay Klein: The sector was badly beaten up in the second half of 2018 and since has moved north again slowly. Most headwinds are related to China trade ills, slow growth in regionals that are beginning to pick up some momentum. Overall sector remains undervalued in my view having taken far too much of a hit. I also think the moved toward merger and consolidation will speed up animating animal spirits on the sector. One must be careful, but there are bargains out there I will be noting for my marketplace site and to some extent, to my SA public followers.

D.M. Martins Research: I see quality as a factor that has outperformed lately, and I think that this will continue to be the case. Not only do the shares of high-quality companies seem to have endured the waves of pessimism better, they have also rebounded more quickly. Even more so than before, I believe companies with a resilient business model that is based on recurring revenues or monetization of a large consumer installed base are most likely to draw the interest of investors, which should help to support their stock prices.

B&B Market: Chinese companies are doing well, for the most part, and this is being reflected in prices. Most are still suppressed (price wise) given the uncertainty in geopolitical events and the economic pressures back home. This continues my view that the majority of well-established companies are still undervalued as technology continues to bolster forward.

Avi Gilburt: I am focusing more heavily on the metals complex. Most specifically, there is a wonderful opportunity to rotate amongst the mining companies as they are differing points in their rally structures.

Eric Basmajian: My favorite exposure, which I have had since late 2017, is a long position in US Treasury bonds. This position has been very profitable, specifically on the long-end of the curve, as interest rates have declined rapidly on the prospects of lower growth and lower inflation. The leading indicators of both growth and inflation continue to point lower which means the trend in yields is likely to persist.

ADS Analytics: Generally speaking both equities and fixed-income are on the expensive side - an unusual combination which makes cross-asset allocation particularly difficult. Pockets of opportunities do remain, however. We think first, Emerging Market US debt is more attractive than other bond sectors due to lower leverage in EM economies and wider credit spreads for the same credit quality as US paper. Short-duration credit is interesting as well given the flatness of the yield curve and the richness of long-end real rates. Finally, sectors linked to the consumer balance sheet like mortgages appeal to us given the much healthier state of the households over the corporate sector.

Anton Wahlman: Many of the automakers are already dirt-cheap, so it's also hard to short them. I think Tesla (TSLA) may be the only obvious short, and the only question there is fine-tuning the timing: Early July or late July

D.M. Martins Research: I maintain my long-standing conviction that a risk-balanced approach to investing is the best strategy in most market environments -- even more so in the current one, which is particularly dominated by uncertainties. Within an all-stock portfolio, allocating enough capital to defensive and low volatility sectors makes sense to me. More sophisticated investors might benefit from a multi-asset class approach (a balanced combination of stocks, bonds, REIT, gold, and commodities) and a small dose of leverage to produce superior absolute and risk-adjusted returns.

B&B Market: The Chinese are shifting towards international expansion. Traditionally they have thrived based on the huge domestic customer base, specifically only the urban population, but now this is shifting. The government is pushing forward with the BRI which will fuel international growth and internally companies are beginning to target the neglected rural population. Companies that are focusing on these bases are going to grow.

Avi Gilburt: I have one word for the Fed - clueless. The market has told them where rates should be, yet they have not followed along. It may take them some time to realize it, but eventually, the market always wins.

Eric Basmajian: Despite popular opinion, the Fed is behind the curve and the bond market is telling this story. The inflation cycle downturn started late in 2018 and the Fed, assuming they cut in July, will be 10 months behind the start of the inflation cycle downturn. The Fed has already allowed significant inversions to take hold across the curve which historically is problematic. Economic data is weaker than the headline numbers suggest and the bond market is pricing this in. The Fed needs to cut rates more quickly than their current language dictates to catch up to the bond market.

Anton Wahlman: It's an insane and counterproductive drop in the bucket. The Fed should tighten, not ease. Get out of the money supply. Stop printing money. 1% or 2% inflation is still inflation. And inflation is theft. Stop it.

Howard Jay Klein: I am worried and getting more so about junk bonds going forward at late cycle financing rushes in before the Fed suddenly reverses gears and goes high.

D.M. Martins Research: I believe the markets have been too quick to anticipate a 75-bp interest rate cut in 2019. Macroeconomic data is still mixed, and the Fed seemed to suggest in June that the board needs to see further signs of deterioration before making a move to ease monetary policy. While I believe the general direction of short-term rates to be lower in the next 6-12 months, I think investors might be disappointed when the Fed likely decides to leave rates alone in July.

Avi Gilburt: Again, I think the metals complex will likely hold the best returns over the coming year.

Eric Basmajian: My favorite long idea is US Treasury bonds. From a secular standpoint, lower rates of population growth and productivity growth, as a result of debt, will cap trend GDP potential. From a business cycle perspective, weakness in the auto sector, housing sector and a slowdown in durable goods consumption growth indicate an exhaustion of pent-up demand. In terms of the shorter term growth rate cycle, the leading indicators of growth and inflation are trending lower.

Across the three-time durations covered at EPB Macro Research, all three support lower growth, lower inflation and thus, lower bond yields. When all three-time durations line up as we have started to see in recent months, the move in bond yields can be dramatic. I expect lower bond yields are in our future and continue to hold a position in US Treasury bonds across the curve.

ADS Analytics: We continue to like the MLP sector which has made a sharp turnaround from the wild west heyday of the "shale revolution". A number of structural tailwinds such as the LP/GP combination as well as the elimination of IDRs means the sector is on a stronger footing than ever. The rightsizing of distributions improved earnings and interest from private equity bode well for the sector in the medium term. Tax-free account investors should consider AMJ as a potential vehicle while taxable accounts should look at FEI or FEN closed-end funds to express this view.

Anton Wahlman: On the long side, outside the auto sector: Gold, Nvidia (NVDA), Amazon (AMZN), and perhaps Alphabet (GOOG) and Facebook (FB).

D.M. Martins Research: I believe that highly pro-cyclical sub-sectors are ripe for a pullback. I have little doubts that we have been in the very late stages of a decade-long economic expansionary cycle that is living off "adrenaline shots", with little extra room for interest rates and unemployment to fall or for fiscal policy to ease. That being the case, I would stay clear of companies that rely too heavily on consumer discretionary spending, including names like Carnival (CCL) and Hilton Grand Vacations (HGV) in the travel and leisure space. These stocks tend to pull back very sharply (-60% or worse, in some cases) ahead of an economic contraction. The potential reward is not worth the sizable risks at this stage.

Thanks to our panel for participating! You can check out their profiles and services at these links:

Watch out for the next edition of the midyear Roundtable tomorrow. We will be publishing on value investing and dividends/income investing to round out the midyear roundtable. If you have any thoughts on the macro discussion above, please chime in below!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Eric Basmajian is long US Treasuries across the curve. ADS Analytics is long FEN Anton Wahlman is Long GLD and Short TSLA.

Source: Seekingalpha.com

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