Can’t fight the feeling any longer. Stocks were unable to hold gains yesterday as relations with China and Fed minutes soured the rally. Fed minutes tea-leaf-reading reminded investors that the pandemic has hurt the economy and that Congress is not sticking to the plan.
N O T E W O R T H Y
Party crasher. I suppose you could call it a party. Everyone loves a comeback story, no one more than traders, especially when it involves a major, diversified index like the S&P500. The Nasdaq is one thing, with its large contingency of moon-shot software companies and oddly named pharmaceutical stocks, but a comeback of the 500 largest cap stocks traded on US exchanges is noteworthy, especially when it comes in record time… in the middle of a pandemic… in the midst of a recession. OK, that should be old news by now, but traders did come to the table with high hopes yesterday. Hopes that the large-cap index would continue its ascent on animal spirits. Some solid earnings after Tuesday’s close and the pre-market analyst beats should have joined forces with positive virus news from Regeneron to help the bull case. Traders were a bit nervous as the S&P500’s historical behavior suggested that the small breech into new territory on Tuesday would lead to a pull back before it could regain positive momentum and begin a new bull run. That is, assuming that the past is any indicator of the present or future. Pro tip: it isn’t. Especially in 2020, where numbers have been defying norms, both positive and negative. As yesterday’s session kicked off, it appeared that the music was still playing and that the prior day’s rally would continue - [FYI, this sentence is a setup]. First, the President remarked that he didn’t want to talk to China "right now", which reminded traders about the simmering tensions between the US and China that have silently escalated in recent weeks. Still, the music played. But then came the Fed’s minutes from last month’s FOMC meeting. Those minutes are always carefully scrutinized by economists and rarely contain major revelations. In case you haven’t figured it out yet, the Fed bankers are a pretty starched and buttoned-up bunch, rarely giving away any hints about their plans. Statements, press releases, and even minutes are carefully crafted to send a unified message. If there are any hints of policy change, they are intentionally placed to warn the markets. If you just read through yesterday’s minutes release once or twice you wouldn’t notice anything really new. They highlighted the economic risks of the virus, they pledged to continue to do whatever was necessary to keep the economy buoyant. We knew that. The notes related that policy makers were encouraged by the turnaround in consumption, which was helped by a slow re-opening and Government stimulus (CARES Act). Uh oh, that was the first eyebrow raiser: Government stimulus, which no longer exists at the consumer level. Further they were hopeful that an at-the-time-expected, even larger, follow on stimulus package would be very helpful in mitigating economic risk. Oh no, that was a clear reminder that the all-important (according to the Fed) stimulus package has not been (or may not ever be) agreed upon. To add to the sour mood, there were no real hints about any new types of policy tools which are expected to be revealed in September. Further, one of the potential tools, Yield Curve Control (YCC), was discussed and received a lukewarm response. Uh oh, again, no clear new stimulus. Encouraged about recent results + no new Congressional stimulus because it may not be needed + no clear urgency to jump on YCC stimulus = stronger dollar + lower inflation expectations. The markets reaction: gold falls, stocks slip, and longer maturity bond yields rise. The end result: more confusion, which almost always means more volatility. The VIX Volatility Index rose by +4.79% yesterday and added another +4.88% overnight. More information is not always a good thing, especially while the music is playing.
THE MARKETS
Stocks slipped yesterday, giving up early gains, as traders mulled Sino-US trade tensions and FOMC meeting minutes. The S&P500 slipped by -0.44%, the Dow Jones Industrial Average fell by -0.31%, the Russell 2000 Index added +0.15%, and the Nasdaq Composite Index fell by -0.57%. Bonds fell and 10-year treasury yields added +2 basis points to 0.68%.
NXT UP
- Philadelphia Fed Business Outlook (Aug) is expected to have slipped from 24.1 to 20.8.
- Initial Jobless Claims (Aug 15) may have slowed further from 963 thousand to 920 thousand.
- Continuing Claims (August 8) are expected to have pulled back to 15 million from 15.486 million.
- The Leading Index (July) is expected to have grown by +1.1% slower than the prior month’s +2.0% growth.
- San Francisco Fed President Mary Daly will speak today.