Insiders worry June may be a shock to markets
Possible Fed rate hike, Brexit, poor job report are factors.
corporate earnings are under pressure. 1. FED RATE HIKES The Federal Reserve’s next policy meeting is June 15 and chair Janet Yellen said Friday that it’s “appropriate” to increase interest rates “gradually and cautiously … in the coming months.” Though investors have come around to the idea that the economy can withstand another quarter-point increase, any signs that the Fed is thinking of following a June hike with multiple additional hikes could upset the bulls.
“There’s a big difference between saying we might (hike) and here we go,” McMillan says. “If they do hike in June, then the question becomes do they hike two or three times, not one or two? And that’s a big shift.” 2. BREXIT IN EUROPE The fear factor related to the “Brexit” vote June 23 has diminished in recent weeks amid polls that suggest Brits will opt to stay in the 28-country European Union. The risk? If investors’ bet on what Bank of America dubs a “Bremain” is wrong and Britain leaves the EU. Such an event is not priced into markets and is likely to cause turmoil in Europe and the United Kingdom.
“The market’s looking at Brexit and yawning,” McMillan says. “(Britain) will probably stay, but the market could be wrong, and that is the type of Black Swanevent that investors should be looking at but are not.” 3. JOBS AND WAGE SURPRISE The May jobs report set for release Friday could also upset markets. If the U.S. jobs count comes in weaker than expected, after a disappointing 160,000 new jobs created in April, it could spark alarm that job growth is weakening, which would hurt the confi- dence of U.S. consumers.
“Two downticks in a row for jobs will rattle investors,” McMillan says. Why? The job market and consumer spending have been two of the bright spots driving the U.S. recovery.
On the flip side, if the job market heats up too much and puts upward pressure on wage growth, it could raise inflation fears and spook markets, says Dan Heckman, of U.S. Bank Wealth Management. While commodity prices, such as oil, rebound, it could put further pressure on the Fed to raise borrowing costs more aggressively to slow things down.