Stocks had their worst day since June, falling yesterday in response to a growing fear that the Fed may come out swinging with bigger-than-expected rate hikes. Bond yields were on the rise yesterday causing big hurt to stocks.
Breathing room. We are, all of us, wise. Most of my regular readers have lots of experience investing in the stock market. Even if you don’t have an MBA in finance with 35 years of institutional portfolio management, but you have carefully watched your portfolio over the past 20 years or so, you know. YOU KNOW that markets rarely, if ever, do what is convenient for investors. In other words, they don’t just go straight up without taking some adventures along the way. On the converse (please don’t ignore this), stocks don’t go straight down forever. What I am referring to is volatility. It happens, and it is part of the game.
Why am I bringing this up today? Well, this week is going to be one of those weeks where stocks will have lots of opportunities to go on one of those adventures which I referred to above. Yesterday I wrote about dueling narratives in A tale of two opinions. Stocks have been optimistic about the Fed’s future course while bonds have been expecting doom and gloom with an inverted yield curve. We are at an inflexion point at which one side is going to dictate where the markets will go next…depending on which side wins. Who will crown the winner? Why, the Fed, of course. It, solely, has its hands on the spigot…no one else. If the Fed cranks it back hard, tightening credit more aggressively, stocks will be left zapped of their bullish energy. If the Fed chooses to play it slow and turn the spigot a little at a time, stocks have a chance of maintaining enough positive momentum to march on, albeit slowly…and not without more adventures along the way.
This week is chock full of important economic numbers. Earnings season is winding down with the last of the large retailers reporting. The important economic numbers include flash PMIs, which hover right around the midpoint between growth and contraction (those come today). We have housing numbers which are expected to show further declines in the bloated housing market. We will also find out preliminary Durable Goods Orders, which are high ticket items that are typically bought using now-more-costly credit. Retail earnings have all been mostly in line with expectations…low expectations. To date most of those retail earnings have come with lowered forward guidance and anecdotal information that suggests that consumers are pulling back. Everything will come to a head this Friday. On Friday, we will get the PCE Deflator which is the Fed’s favorite inflation gauge. Investors, AND THE FED, will look for this number to confirm what its cousin, Consumer Price Index / CPI, told us two weeks ago: inflation may have peaked. Topping off Friday’s tension will be one of the holiest banker holidays of the year: Fed Chair Jerome Powell will speak at the Jackson Hole Symposium. The symposium is a get-together for bankers, academics, policy makers, and economists, hosted by the St. Louis Fed. They gather to discuss the economic climate…and policy…and maybe play a few games of horseshoes or Bocce Ball (or Lawn Bowling, depending on where you’re from). Sounds like good times, eh? No policy is made, just discussed. What they discuss and how is not as important for stocks as what the Fed Chairman says and how. AHA! He finally gets to the point.
Yesterday’s rally in yields played a very large hand in the oversized decline in equities. What drove those yields higher is fear that Powell will deliver a hawkish message on Friday, amplifying the hawkish messages sent by most of the Fed Governors who have spoken over the past few weeks. Those bearish-for-stocks signals have been growing in number and volume over the past few weeks and the Chair, himself will have a chance to either sharpen them up or soften them up. While stocks and bonds have been more volatile these past few days, interestingly, the futures markets have remained very stable with little change. Those continue to predict +100 basis-points in hikes between next month and November, and another +25 basis-points hike to end the year around 3.5%. That is pretty aggressive, and the market has already factored it in. Will Powell say something that causes the market to factor in yet more aggressive action for the Central Bank? We will just have to wait and see…and deal with this run-of-the-mill volatility that ALL OF US wise, have learned to expect… though we may have forgotten about along the way.
YESTERDAY’S MARKETS
Stocks fell yesterday as yields jumped, reflecting fears that the Fed will not be as benevolent as recently hoped for. This, all in anticipation of Chairman Powell’s big policy speech at Jackson Hole this Friday. The S&P500 fell by -2.14%, the Dow Jones Industrial Average traded off by -2.91%, the Nasdaq Composite Index dropped by -2.55%, and the Russell 2000 Index declined by -2.13%. Bonds fell and 10-year Treasury Note yields climbed by +4 basis points to 3.01%. Cryptos dropped by -4.88% and Bitcoin declined by -1.63%.
NXT UP
- S&P Global Manufacturing Flash PMI (August) is expected to have fallen to 51.8 from 52.2.
- S&P Global Services Flash PMI (August) is expected to have risen to 49.8 from 47.3.
- New Home Sales (July) may have declined by -2.5% after easing by -8.1% in June.