Fed stays cautious as worst earnings season since the Great Recession looms
Global risks those two words encapsulated the gist of the minutes from the Federal Reserves March 15-16 meeting. And thats ironic, given that U.S. GDP estimates continue to tumble toward zero, suggesting clear and present dangers to the domestic economy.
It was at this March meeting that the central bank left interest rates unchanged and also reduced its likely target number of 2016 rate hikes from four to two. That caution was reflected in the new minutes, which found that several Fed officials noted their concern that raising the target range as soon as April would signal a sense of urgency they did not think appropriate. In contrast, only some Fed policymakers backed raising rates at the next meeting, set for April 26-27.
Ongoing downside risks seen: Overseas risks were the major rationale for the Feds ongoing caution. Several participants expressed the view that the underlying factors abroad that led to a sharp, though temporary, deterioration in global financial conditions earlier this year had not been fully resolved and thus posed ongoing downside risks, the minutes read.
Although the focus was clearly on international economic developments after all, the word global was used about 22 times throughout the minutes the Fed document stressed that bankers are watching not only domestic economic releases, but also information about developments abroad and changes in financial conditions.
Earnings disaster could derail June hike: The takeway from the minutes is surprise, surprise that the Fed will continue its data-dependent stance and more likely than not will not raise rates in April. The June meeting, rather, is what Wall Street is now focusing on. But what will happen between now and then that more than likely will see the Fed kicking the can even further down the road? First-quarter earnings season, thats what.
CNN went so far as to call the upcoming earnings season the worst since the Great Recession.
Wall Street is bracing for a 7.9% plunge in first-quarter profits in S&P 500 companies as earnings season kicks off next week, CNN reported. That would be the deepest decline since 2009, according to S&P Global Market Intelligence. The culprits? A strong dollar, falling oil prices, and slow global growth. The energy sector is expected to fare the worst.
Fragile apple cart of stocks: This earnings season does have the potential of upsetting a rather fragile apple cart, independent strategist Peter Kenny warned of recent stock gains.
Barrons added: Bottom-up expectations have grown increasingly pessimistic over the past three months, to the point where Wall Street now sees corporate profits slumping for a fourth straight quarter for the first time since the financial crisis. Barrons cited a FactSet estimate of an even worse 8.5% drop in S&P 500 company earnings from the previous quarter.
If a surprise rate hike were to occur in April or June, expect stocks to surrender their tenuous gains. After all, weve already seen that even the tiniest of interest rate hikes has gone hand in hand with a huge drop in the markets, noted Robert Murphy of The Mises Institute.
Expert sees $10,000 gold: Ironically, stocks stayed largely in the green Wednesday while gold hung on to mild losses after Tuesdays surge of more than 1%. But investors need gold now more than ever, said Jim Rickards of West Shore Funds in a new Bloomberg interview.
Right now with the Fed dovishness, its going to lead to a weaker dollar. The dollars at a 10-year high on the index. I would expect a weaker dollar, stronger euro, stronger yen, but gold should also go up as the dollar weakens.
Given the vulnerabilities in the stock market, investors need hard assets, not equities alone or even gold ETFs, Rickards said. Stock-market wealth is all electrons, he noted.
If you dont have some assets (that are) tangible, I recommend gold for 10%, real estate, fine art, silver, there are other asset classes, but you have to have something physical or it can all be wiped out, he said, citing the recent massive cybertheft experienced by Bangladesh as well as several New York Stock Exchange closures throughout history.
Rickards maintained his longstanding call that gold will eventually be valued at $10,000 under a global reset of the world financial system under a new gold standard. What does the price of gold have to be to support world trade, world commerce, and the world money supply? Its eighth-grade math; its not difficult. Thats where gold will end up when confidence in paper money is lost during the next major financial crisis. But until then, investors need gold to weather the potentially rocky earnings season ahead.