- The Federal Reserve's meeting this week and the G20 summit next week are poised to give investors key updates on two of the stock market's biggest drivers of late: interest rates and trade.
- We've rounded up commentary from top Wall Street experts on what is at stake and where to invest for every eventuality.
- Click here for more BI Prime stories.
Wall Street is waiting in suspense for the outcomes of two events that will unfold over the next two weeks.
These could have been run-of-the-mill proceedings at any other time. But given that they relate to what are arguably the biggest drivers of recent volatility — monetary policy and trade policy — they are crucial forks in the road that will set the tone for the rest of this year.
The action begins on Wednesday, when the Federal Reserve concludes the policy meetings where it's expected to debate its first interest-rate cut since the Great Recession in 2009. Almost no one expects the guillotine to drop this week, but any inklings for the months ahead that are contained in the Fed's statement, projections, and press conference will be of market-moving importance.
The action continues next week Friday at the G20 meeting in Japan, where President Donald Trump and his Chinese counterpart are expected to meet. Trump has already suggested a trade-war escalation is on the cards, threatening to slap tariffs on $300 billion worth of additional Chinese goods if President Xi Jinping skips the gathering.
These events, though more than a week apart, are intertwined in that a worsened trade war would hurt the US economy and pressure the Fed to reduce borrowing costs. Here's what some of Wall Street's top strategists are expecting for the weeks ahead, and how they recommend you should invest.
The Fed meeting
Besides this being the first serious prospect of a rate cut in 10 years — and since the Fed began its hiking cycle in 2015 — what makes the meeting so consequential is the dramatic manner in which traders adjusted their expectations.
At the start of May, traders saw just an 8% probability that the Fed will cut rates during its July meeting. Within six weeks, however, they priced in a near-100% chance of a cut.
For an explanation of why, look no further than the escalating trade war that tanked the stock market and sparked a bond-market rally in May. Fed Chairman Jerome Powell further stoked the market's speculation about a rate cut when he said the central bank would "act as appropriate" to keep the economic expansion going.
"Similar repricings this far before a meeting have only happened a handful of times in the last 30 years and those instances tended to be in or within 12 months of a recession," said Michael Wilson, Morgan Stanley's chief US equity strategist, in a note to clients.
The Fed frequently delivered on rate cuts before or at such meetings when traders changed their minds so quickly, Wilson said. What this means is that the Fed's decision either way holds unequal outcomes for investors: If they don't cut in July, they risk triggering a stock-market meltdown and tighter financial conditions. And if they deliver what the market is already expecting, a modest relief rally would follow, Wilson said.
BTIG's Julian Emanuel expects the Fed to deliver what investors are expecting, with at least two rate cuts this year. In this eventuality, financial stocks will benefit as the long-term interest rates that banks lend at rise faster than the short-term ones they use to borrow, he said.
The G20 summit
The market's performance in May is all you need to look at to understand investors' fears about a global trade war.
The chaos intensified in the first week of May, when Trump's threat to raise tariffs on $200 billion of Chinese goods sparked the worst week of the year for the S&P 500 and Dow Jones industrial average. All told, the Dow fell for five straight weeks through May 24, its longest losing streak in nearly eight years.
That's why all eyes will be on what Trump and Xi can achieve at the G20 meeting.
In the worst-case scenario where there's no trade agreement and the Fed remains bent on raising rates, go long gold and volatility, said Michael Hartnett, the chief investment strategist at Bank of America Merrill Lynch, in a recent note to clients. The SPDR Gold Shares exchange-traded fund and Treasury bills will be likely outperformers, while investment-grade bonds and tech stocks will be likely underperformers, he added.
But the reverse scenario could be favorable for stocks, according to Emanuel. In fact, he says the bar for progress on trade is low because both Trump and Xi understand the economic damage that awaits their countries if the dispute drags on.
A trade deal would open the gateway for the S&P 500 to rise to his year-end target of 3,000, or nearly 4% above its current level, Emanuel said.
Hartnett also said the S&P 500 would rise above 3,000 if there's a deal. In that scenario, go long stocks and high-beta assets, he recommended. The most likely winners would be small-cap stocks, semiconductors, industrials and emerging-market bonds.
And, you might want to avoid consumer staples, which he sees as the likely underperformer.