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OVERNIGHT DEVELOPMENTS
U.S. futures and European stocks held steady on Wednesday as investors shrugged off a credit-rating downgrade in China and looked ahead to central-bank policy decisions.
Futures pointed to a flat opening on Wall Street and the Stoxx Europe 600 was unchanged recently, with gains in travel and leisure shares offsetting declines in the auto sector.
In Asia, Chinese stocks pared initial losses to end higher after Moody’s Investors Service lowered the country’s credit rating for the first time since 1989. Most other stock exchanges in the region closed higher.
BREAKFAST BRIEFING
If the bull market rally over the past eight years taught investors anything, it was this: Buy the dips.
The persistent march higher for stocks since 2009, accompanied by regular pullbacks, has rewarded investors who bought in when the market sank.
Opportunities to buy low are few and far between these days with a market that’s been unusually steady over the past year. Even when the stock market does muster a fall, investors are stepping in to swiftly buy.
A stark example was last Wednesday’s abrupt 1.8% slide in the S&P 500, which recovered completely in four trading days. By one esoteric metric, it was the second-fastest comeback for a sudden market plunge since 1928, according to Bank of America Merrill Lynch. The only speedier bounce followed a “flash crash” in 1962.
Evidence suggests that waiting for stocks to tumble before scooping up shares is a losing proposition over the long run. Samuel Lee, founder of SVRN Asset Management and a former funds analyst at Morningstar, ran a raft of scenarios that showed waiting for a 10% or more correction before buying seldom beats a simple buy-and-hold strategy over the long term. The main reason is obvious: holding cash while stocks chug higher is costly. His research suggests waiting around for big crashes often translates into missing out.
And there’s no doubt some investors feel pangs of regret with U.S. stock benchmarks notching record high after record high, even despite multi-year high valuations, a lackluster economy, and political and policy uncertainty. Indeed, a survey of global fund managers conducted earlier this month by Bank of America Merrill Lynch found investors are sitting on 4.9% cash, above the 10-year average of 4.5%.
There’s a perpetual worry that going all-in now might mean buying at the top. To obviate this risk, Doug Sandler, chief U.S. equity officer at RiverFront Investment Group, recommends that investors heavy in cash put a portion into the market immediately, keep a bit on hold for shallow declines and then schedule specific dates in the months ahead buy small slugs of stocks regardless of market conditions.
KEY EVENTS
9:00 a.m.: FHFA House Price Index [Prior: 0.8%; Consensus: 0.5%]
The Federal Housing Finance Agency is due to release home-price data for March after the prior month’s reading showed a seasonally adjusted 0.8% rise. The data is based on mortgages backed or guaranteed by the FHFA-regulated Fannie Mae and Freddie Mac.
10:00 a.m.: Existing Home Sales [Prior: 5.71 million, 4.4%; Consensus: 5.65 million]
Purchases of previously owned homes rebounded in March to 5.71 million, up 4.4% from February, according to the National Association of Realtors. That was their highest pace in 10 years. The NAR’s existing home sales tally is expected to drop to 5.65 million in April.
10:30 a.m.: EIA Petroleum Status Report
U.S. crude-oil stocks are expected to show a decrease, according to a survey of analysts and traders by The Wall Street Journal. Estimates from seven analysts and traders surveyed showed that U.S. oil inventories are projected to have decreased by 2.2 million barrels, on average, in the week ended May 19. All seven analysts expect stockpiles to shrink. Forecasts range from a decrease 3.7 million barrels to a 592,734-barrels drawdown.
2:00 p.m.: FOMC Minutes
Minutes from the Federal Reserve’s May monetary policy meeting will be scrutinized for clues on when the U.S. central bank might start reducing its $4.5 trillion balance sheet and how that could affect the pace of interest-rake increases. The Fed kept its benchmark interest rate steady at the May meeting, but has indicated it intends to raise rates twice more this year.
STOCKS TO WATCH
Lowe’s posted quarterly sales and adjusted earnings that fell short of Wall Street’s targets. Shares of Lowe’s are off 4.5%.
Shares of Tiffany are down 4.7% premarket after the company beat profit expectations but suffered a surprise decline in same-store sales.
Shares of Bunge lost 4.7% premarket, pulling back from a 17% rally Tuesday that had been fueled by news that Glencore had approached the grain trader about a potential takeover.
Nvidia was up 1.7% ahead of the bell on reports that Japan’s SoftBank has amassed a $4 billion stake in the chip maker.
MUST READS
Ex-CIA Boss: Russia Was in Contact With Trump Associates: Former CIA director John Brennan testified Tuesday that U.S. intelligence agencies grew concerned after they learned that Trump campaign associates had been in contact with Russian officials, adding that Russia “brazenly” interfered in the election.
Bipartisan Pushback Greets Trump’s Proposed Budget: President Donald Trump’s proposed $4.1 trillion spending blueprint amounts to a sweeping overhaul of the social safety net while projecting a big boost to economic growth that could be difficult to achieve.
Humans Still Rule Machines in Insurance: Insurance companies such as AIG use new techniques including algorithms, to tap into a growing array of detail to price risk. Still, human underwriters have an essential role to play.
Moody’s Cuts China Rating for First Time Since 1989: Moody’s Investors Service cut China’s sovereign credit rating, citing expectations that the country’s financial strength will deteriorate in coming years as debt keeps rising and the economy slows.
Glencore Makes Takeover Approach to Bunge: Glencore has made a takeover approach to grain trader Bunge, a move that would make the Swiss mining giant a major player in the U.S. agriculture market.
Blackstone Is Taking Over Mom-and-Pop Real Estate Investing: Blackstone in January launched its first nontraded real-estate investment trust, a vehicle marketed to small investors as a way to participate in the commercial real-estate industry without the volatility of a traded REIT.
Europe’s Economy Keeps Running With the Bulls: A rush of eurozone survey data points to continued growth momentum. Europe is still beating expectations
Why Donald Trump Doesn’t Scare the Market: The VIX has stayed low not because the market isn’t worried, but because the market doesn’t know exactly what to worry about.
CHART OF THE DAY
May 24, 2017 at 07:19PM
from Chris Dieterich
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