 The Market Sum | Insight after the bell
By Caleb Silver, Editor in Chief Monday's Headlines 1. U.S. Markets on Edge as Fed Decision Approaches 2. Why Cut Now? 3. Earnings Check Up 4. The Pound has a Problem 5. Uh Oh, India Markets Closed
 Markets Today
The waiting is the hardest part - Tom Petty
The legendary rocker Tom Petty sang those lyrics in 1981 on the chart topping hit, "The Waiting," and while Petty left us too early, his words are prescient given where we find ourselves for the next two days.
Stocks were little changed today as investors wait for the Federal Reserve's decision on interest rates due at 2 p.m. ET on Wednesday. While most investors assume the Fed will cut interest rates for the first time since the financial crisis, only the Fed knows for sure if it will and by how much. Will it be 0.25% or 0.50%? Or will the Fed decide not to cut and continue to be patient, before resorting to accommodative measures to prolong the economic expansion? If the Fed does cut, what will it say about the economic prospects for the U.S. and the rest of the world in the second half of 2019 and into 2020?
The waiting is the hardest part.
photo courtesy Smithsonian.org  Why Cut Now? Why is the Federal Reserve Cutting Interest Rates Now? The U.S. Economy is growing—albeit slower than forecast—unemployment is near historic lows, and the stock market is at record highs. What gives?
Think of it as preventative medicine. The Fed sees the clouds gathering and thinks a rate cut may stave off a recession or stamp it out quickly should one occur.
It's looking at these warning signs:
By cutting rates, borrowing costs for businesses decrease, which makes it easier for them to spend on growth like building plants and infrastructure, hiring more people, and investing for the future. Even though unemployment is low and rates are low by historical standards, the Fed hasn't made a rate cut in over ten years. This is a pretty big deal. Here is the Effective Fed Funds Rate since 2006.  Lower interest rates also make it cheaper for consumers to borrow for things like car loans, mortgages, and small business loans. It also makes it easier for consumers to pay down debt—and they have historic amounts of credit card and student loan debt.
So...an interest rate cut is both preventative—in case there is a global recession headed our way—and stimulative, in that it makes businesses and consumers spend more.
Earnings Check up We are a little over halfway through earnings season with nearly 60% of companies reporting their results. We've seen some blowout earnings from the likes of Alphabet and Facebook, which have helped propel the S&P 500 and Nasdaq to record highs.
In general though, companies are beating their forecasts by at least a little bit, which they lowered at the end of the first quarter. It's that earnings tango we wrote about a few weeks ago and it's as old as the stock market.
It's what companies are saying about the future that is concerning.
According to Bank of America's equity research team, second half of 2019 estimates have fallen 1% since the start of July as companies have lowered their forecasts. Consumer stocks and healthcare stocks are the exception, but Industrials and Materials have been warning of a steeper slowdown ahead.
According to BofA, earnings revisions to the downside are at their highest levels since 2013.  Negative sales revisions are also increasing, albeit not as much as earnings. But sales, on average, are expected to only grow 3% year over year, versus 6% in the first quarter. Blame the trade war, a slowing global economy, and currency headwinds given the strength of the U.S. dollar, but you can't ignore the slowdown. The Federal Reserve sure isn't.  Pounded It didn't happen right away, but just a few days after Boris Johnson was sworn in as the new Prime Minister of the U.K., the British pound is slipping against the euro and the dollar.
Johnson has made it clear that he will not hold meetings with other EU leaders unless they agree to make key changes to the Brexit deal as proposed. At an event in Scotland today, Johnson said, "The withdrawal agreement is dead, it has got to go, but there is scope to do a new deal," although it's not clear that there is. According to the WSJ, Johnson is preparing an ad campaign to prepare British businesses for a hard break from the EU that will put a sudden end to nearly four decades of relatively smooth trading relations.
The pound fell 1.3% today to its lowest levels against the euro since Sep. 2017. Its losses against the dollar are even steeper—now at a 28 month low.  Uh Oh, India India's Nifty 50 has been left out of the emerging markets stock rally of the past year. There were hopes that the Narendra Modi-led government returning to power for a second term might boost the stock market on the backs of broader economic reform, but the early indications are not positive.
Among the issues souring sentiment, a tax increase on the super wealthy, a proposal to tax share buybacks by listed companies, and a proposal to increase the minimum public shareholding requirements. Investors have yanked $2 billion out of India in the month of July—far more than any other emerging market. That's led to a steep sell-off for the Nifty 50 Index of the most popular stocks on the continent. As James points out, it has fallen to touch its 200 day moving average. That's never a good sign. 
chart courtesy www.koyfin.com  Mylan's stock rose by almost 13% after the announcement that Pfizer is combing part of it into its off-patent drug business. Shares of the popular fast casual restaurant Chipotle increased by nearly 4% today after Goldman Sachs initiated coverage of it with a "buy" rating.  Nektar Therapeutics fell the furthest today, with an almost 6% decrease in its stock price. Interestingly, unlike the company its expecting to merge with, shares of Pfizer still fell by nearly 4%, due in part to the deal being comparatively more beneficial for Mylan.  Word of the Day The federal funds rate refers to the interest rate that banks charge other banks for lending them money from their reserve balances on an overnight basis. By law, banks must maintain a reserve equal to a certain percentage of their deposits in an account at a Federal Reserve bank. Any money in their reserve that exceeds the required level is available for lending to other banks that might have a shortfall.  illustration courtesy MOAF.org
Today in Financial History July 29, 1869: The New York Stock Exchange is formed from the merger of the New York Stock & Exchange Board with the Open Board and the Government Board (where Treasury bonds are traded).
James K. Medbery, Men and Mysteries of Wall Street (Fields, Osgood & Co., Boston, 1870, reprinted Fraser Publishing Co., Wells, VT, 1968), p. 15.
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Monday, July 29, 2019
On Edge
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