This Federal Reserve is expected to make a decision on interest rates this week when the board of governors meets this Wednesday. The market has priced in at a minimum a 25 basis point interest rate cut and a slight possibility of a 50 basis point drop. The Federal Reserve has a tough decision to make as 2nd quarter GDP came in pretty strong at 2.1%, down from the 3.1% print in the first quarter. Personal savings declined slightly to 8.1% of personal income from 8.5% in the first quarter. The US consumer remains strong and disposable income was up $193 billion or a 4.9% increase. The US economy is slowing slightly, yet still growing at a faster clip than all other developed economies. Jerome Powell is expected to become proactive and cut rates in the face of tariffs and a global growth slowdown.
The big question is how the market will react if the Federal Reserve does cut rates. Market pundits have been saying this is a sell the news event, meaning no matter the outcome the stock market will fall some. It would be reasonable to expect a pull back of some kind because the market is near all time highs and be driven higher by expected accommodative monetary policy. The S&P 500 sits near all time highs above a pivotal 3000 point market, which will serve as a support or resistance depending on the broad move in the market after the Fed decision.
Certain stocks have performed during 2nd quarter earnings season, specifically UPS which jumped nearly 15% on strong earnings. The pick up in profit was driven by customers demanding next day air services to deliver packages and other e commerce materials. Amazon has it own air delivery service with Amazon Air; however, the company has stressed the delivery capabilities of UPS and Fedex as consumers demand products almost immediately from the moment they click the order button online.
Boeing fell on worries the company may stall production for the beleaguered 737 Max. The company cited concerns arising from the MCAS software being certified for a 4th quarter return to service for 737’s and to resume delivery’s. The company has run out of space to store the planes and it has been reported that an employee parking lot has been re-purposed as a storage area for non delivered 737’s. Boeing stock has dropped nearly 10% after they announced large accounting charges or impairments for liabilities related to the 737 Max groundings. The company lost $3.3 billion from operations in the second quarter. The company stated they may delay production of more 737 Max planes until they can time the delivery of current planes in storage. The company more than likely will get the plane off the FAA ground order by the 4th quarter and the company should resume delivering planes. The biggest strength to an investment in Boeing is their total backlog of $474 billion, including more than 5,500 commercial airplanes. Meaning customers have committed to purchase these planes and the company has nearly 5 years of sales in their pipeline. Airbus has been trying to steal Boeing customers with their A330 Neo offering, but hasn’t been successful in this effort as many airlines remain committed to using a Boeing ecosystem for their cockpit controls. The company lost $1 billion of cash during the quarter related to the 737; however, their balance sheet maintains an additional $10 billion of cash on hand to see the company through these tough times.