Will the Fed cut interest rates again at its December 11 FOMC meeting next week? There’s plenty of chatter suggesting the answer will be “yes” and Fed funds futures are in agreement.
The January ’08 contract is priced, as we write this morning, for Fed funds at just under 4.14%, which is to say about 36 basis points below the current 4.50%. To extrapolate the message further: a 25-basis-point cut is likely, but there’s debate about whether a 50-basis-point slash is possible.
Nonetheless, bond guru Bill Gross of Pimco predicts the central bank will have to go much lower. “To restart a near recessionary economy we may need to eventually go down to 3% or lower,” he wrote in his latest missive that was published yesterday.
Wall Street couldn’t be happier. The prospect of another rate cut, and perhaps another and another, fired up the buyers yesterday. “Everyone pretty much expects a cut and that’s been contributing an underlying upward bias to equity prices during the recent rallies,” William Hummer of Wayne Hummer Investments told CNNMoney.com yesterday.
Prices may be going higher. But what of earnings? In particular, the Q4 earnings. According to Zacks.com, the S&P 500 will continue to post higher earnings in this year’s final quarter. But comparisons with the previous quarter will be tough. Zacks reports that S&P earnings rose a strong 11.3% in Q3. Expectations for Q4 call for a drop by one-third to a 7.7% rate of growth. Given the bearish talk about the economy, one might reason that a 7.7% jump in earnings isn’t all that bad. Quite so. But is the stock market priced in anticipation of 7.7%?
While we ponder that question, consider too that the net income trend for S&P 500 companies looks considerably darker. Again quoting Zacks: Q4 total net income growth before nonrecurring items is projected to fall nearly 5%. That compares with a nearly 1% fall in Q3 and an 8.2% rise in Q2.
Of course, there’s always the possibility for a surprise, although that can cut both ways. A few days back, Goldman, Sachs, for instance, slashed its S&P earnings estimates thanks to trouble in banking. Deutsche Bank did the same.
Does it matter? Based on yesterday and today as of mid-morning, the bulls only see opportunity.
No, the Fed can’t engineer business cycles out of existence, although that won’t stop it from trying.