By Barbara Kollmeyer, MarketWatch
The Federal Reserve seems to have successfully walked a tightrope of market expectations on monetary policy, and investors are cheering — at least for now.
The S&P 500 is on the verge of fresh highs Thursday following a dovish Fed meeting that has helped to heighten chances of a July interest rate cut. That is even amid some concerns that the picture for equities may dim down the road.
“It makes sense for stocks to advance in an environment of lower expected interest rates, but what would be important for investors to also ponder is whether this is a sign of an economy that can’t sustain its growth rate anymore,” said Konstantinos Anthis, head of research at ADSS.
That leads us to our call of the day , from Tracie McMillion, head of global asset allocation strategy for Wells Fargo Investment Institute who believes U.S. equities have seen all the gains they are going to get this year, and has been urging her clients to pare back a little.
“We think a lot of positives are priced in. There are two (U.S.) interest rate cuts priced in to the market. We think there will be one,” she told MarketWatch in an interview.
McMillion argues that while investors may be counting on more fuel for equities from a likely trade deal between the U.S. and China, a resumption of tariff pressure over Mexico and the European Union in the fall could tug on the other side. As well, the U.S. government will be confronted with an autumn deadline over the U.S. debt ceiling.
“We’re expecting all of those things could inject additional volatility, which is why we’re advising clients to buy when we’re under 2,800 (on the S&P) and pare back when we’re over,” says McMillion.
But when those pullbacks come, she says they prefer to shop for U.S. companies with higher quality earnings and lower debt, that are cyclical and sell items consumers can afford in a booming economy. Information technology, industrials and financials are some of the sectors on her list.
She’s also been urging clients to take a good look at emerging-market equities, which are looking like a better bargain. As this chart from Wells Fargo shows, a valuation indicator based on stock prices relative to operating cash-flow per share is showing a hefty discount for emerging-market equities versus U.S. large-caps:
The Dow /zigman2/quotes/210598065/realtime DJIA +0.09% , S&P /zigman2/quotes/210599714/realtime SPX +0.28% and Nasdaq-100 /zigman2/quotes/210598365/realtime COMP +0.40% have all opened higher. Oil is higher, while the dollar /zigman2/quotes/210598269/delayed DXY -0.40% is down versus big rivals, notably against the Norwegian krone /zigman2/quotes/210561820/realtime/sampled USDNOK +0.0828% after that central bank hiked interest rates. The Bank of Japan left rates unchanged as did the Bank of England.