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July 10, 2019, 8:55 a.m. EDT

Weak U.S. data could trigger 10% stock plunge, says strategist

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By Barbara Kollmeyer, MarketWatch


Magnet Releasing/Everett Collection
Keep a lookout for the data.

Step right up to the hot seat, Jerome Powell.

Investors from here to Hanoi can think of nothing else but the Fed chairman’s appearance on Capitol Hill Wednesday. So far, we’ve learned the Fed will act if needed (see Economy), but will the market get the quarter-point move it wants at the end of the month?

To be sure, the Fed could surprise markets with no move later this month, although this is seen as unlikely by market participants. And as much as investors count on central banks to keep driving up equities, rate-cut rallies have proven short lived over the past 20 years, say some.

Looking for surprises? Watch the data, not monetary policy, says our call of the day from Elia Lattuga, the deputy head of strategy research at UniCredit. He doesn’t see the Fed straying too far from market expectations in coming months.

“The big question mark is what the data will tell us about growth over the next few months,” Lattuga told MarketWatch in an interview. His darkish view sees the U.S. edging toward a recession in 2020, with “significant” signs of that showing up by year-end. Pressure from global trade developments won’t help either.

“The data picture is the key driver in this environment for risky assets. We project a broadly flat performance for equities for the rest of the year, so limited upside potential. However, we see risks that a deterioration in the growth outlook affects risk appetite,” and possibly trigger a 10% drop for stocks, he said.

The big banks have been indeed growing cautious, and Lattuga doesn’t stray far from that playbook as he suggests investors cash in on some gains they’ve seen this year, and take a less aggressive stance for the latter half of 2019.

The strategist says fixed income is an attractive place to park cash in the coming months, and investors might want to add longer-term bonds given support from monetary policy. But they should take care with higher-yield, and often higher risk bonds, given how they often track equity markets closely, says Lattuga.

The market

Dow , S&P  and Nasdaq   futures are up on dovish comments from Powell. Gold is up, the dollar /zigman2/quotes/210598269/delayed DXY -0.32% is flat, and oil is climbing ahead of U.S. stockpiles data later.

Europe stocks /zigman2/quotes/210599654/delayed XX:SXXP -0.18% are mixed, and it was the same for Asia /zigman2/quotes/211618636/realtime XX:ADOW +0.71% . The EU cut the region’s growth forecast again, while producer prices in China continued to slide toward deflation.

The economy

Powell says the central bank will “act as appropriate to sustain expansion,” in prepared remarks ahead of 10 a.m. testimony. Wholesale inventory data is due around the same time, with an appearance by St. Louis Fed President James Bullard and the minutes of last month’s Fed meeting coming later.

/zigman2/quotes/210598269/delayed
US : U.S.: ICE Futures U.S.
97.68
-0.32 -0.32%
Volume: 0.00
Nov. 18, 2019 11:17a
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/zigman2/quotes/210599654/delayed
XX : STOXX
405.29
-0.75 -0.18%
Volume: 0.00
Nov. 18, 2019 5:12p
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/zigman2/quotes/211618636/realtime
XX : Dow Jones Indices
3,363.83
+23.68 +0.71%
Volume: 0.00
Nov. 18, 2019 11:27a
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