As Deutsche Bank notes poetically, "April showers brought May flowers" but adds "Watch out for June thunder storms." Why the caution?
"Because S&P reached a new high of 2130 last Thursday on an 18 trailing PE, the highest since 2010 despite anemic EPS growth expected this year. Both EPS and GDP are struggling to expand in 1H, putting the burden for a decent year on 2H. A 2H rebound is likely, but trend growth is very uncertain. Given the growth outlook, it will take long-term Treasury yields staying very low when the Fed starts hiking to support an 18 or higher trailing S&P PE. This moment of truth for long-term yields upon Fed signals of a Sept hike is crucial for summer stock performance, but we also see other important summer issues to watch."
Here are Deutsche Bank's 10 themes and "summer issues" to keep an eye on as we leave May behind and enter June:
- Is Fed a “go” or “no-go” for Sept liftoff? We expect a Sept hike on falling unemployment even if US GDP growth stays slow. We think the Fed will issue more guidance that the FF rate is unlikely to exceed 2% over the next 2 years.
- What does this mean for the dollar? We expect further dollar appreciation, DXY ~100 and Euro down to near $1.00 by yearend, but not much stronger than that if Fed hikes appear likely to stay slow and plateau at 2% in 2017.
- How do long-term Treasury yields react to the start of Fed hikes? Long-term yields could spike up to about 2.8% this summer upon strong job reports, but should stabilize there if the dollar climbs and unit labor costs don’t accelerate.
- Will US GDP bounce back with ~3% growth for the rest of 2015 after 1Q’s contraction? What is a realistic est of trend US growth for the next few years? We see a moderate bounce and 2.0-2.25% trend assuming better productivity.
- Has the low in oil prices been set or need to be retested or new lows? We think WTI is capped at $70 through 2016 provided no geopolitical flare-ups. Oil prices are likely to drift down near-term as US and int’l producers vie for share.
- Greece? Is Europe prepared to pull the plug if no agreements by June end?
- US Supreme Court ruling on plan subsidies on federally set up exchanges? The law says subsidies can only be paid through state established exchanges. A decision is expected in June and if disallowed the Administration will need to turn to Congress to pass a law allowing such subsidies and this will open the door to other ACA modifications and maybe a foreign earnings repatriation holiday comes along with this legislation. There are risks to managed care stocks in this process and it is the only industry we are not OW within HC.
- Does the US put boots on the ground in Iraq again to deal with ISIS? This is becoming a problem for President Obama, but we doubt any ground action.
- China and other EM economies? US, Europe and Japan might be in a long lasting period of synchronized slow growth, but EM deceleration seems likely to continue and thus moderate global growth with vulnerability to shocks.
- US Presidential election. By late 2015 a republican favorite should emerge. This could be a very heated campaign even if Hillary leads. It will raise uncertainties on many US policies including corporate taxes, healthcare, banks and energy, and it might politicize issues related to the Fed and the dollar.
