With the S&P 500 Index near our year-end fair value target of 3,000, the big question is whether investors should sell. We don’t think so, mainly because the Federal Reserve (Fed) could continue to push along this bull market. Additionally, one of the key drivers to extending the business cycle is the consumer, and we continue to be impressed with how well the consumer is holding up.
Time to Sell?
The S&P 500 Index is within 1% of our year-end fair value S&P 500 target of 3,000 after rallying 20% this year and broaching that target several times in July. We set that target in November 2018 and have maintained it since then. Does this mean it’s time to sell?
We don’t think so, primarily because the market is giddy about rate cuts. The adage “Don’t fight the Fed” applies here. The last five times the Fed began cutting rates outside of recessions (1984, 1987, 1989, 1995, and 1998), the S&P 500 rose an average of 11.1% over the subsequent six months and 15.8% over the next year.
The second quarter gross domestic product (GDP) report will likely show consumer spending makes up 2.8% of overall GDP. This is a good sign, but things aren’t perfect, as other areas of the economy continue to struggle due to a lack of clarity over trade. Business investment, housing, government spending, trade, and inventories are expected to drag down GDP by about 1.2%, according to Atlanta Fed projections.
Business investment is key to extending the business cycle. Higher capital expenditures (capex) leads to higher productivity, which directly feeds into higher economic output. Additionally, higher productivity helps promote healthy inflation, as it helps keep employer costs in check.
The consumer remains healthy, and we expect consumer spending to make up 2.8% of second-quarter GDP. As the chart below shows, this would be the highest GDP for any quarter since the end of 2014. The bad news is the other components of GDP (business investment, housing, government spending, trade, and inventories) are expected to be a drag as concerns over trade uncertainty linger.
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