In a roller-coaster week, stocks eked out a small victory. Though the major stock indexes all rose, it didn’t much feel like a positive trend.
Blame that on heightened uncertainty and rising volatility, which began the previous week after Federal Reserve officials stirred up fears of an interest-rate increase happening sooner rather than later. Moreover, recent polls suggest that the U.S. presidential election has tightened, contributing to investor insecurity.
This Tuesday and Wednesday, the policy-setting Federal Open Market Committee meets in what is likely the most-watched Fed confab of the year. On balance, the U.S. economic data released last week—including statistics on August retail sales and industrial production—were soft, reinforcing the market’s expectation a hike won’t come this week.
The probability of a rate hike, as measured by the fed-futures market, sank to 20% from more than 30% a week earlier. Still, investors fear a September surprise. The market was also pushed down by lower oil prices, but received some support from Apple (ticker: AAPL). Its shares rose 11%, to $114.92, on indications of strong sales of its new iPhone 7.
Financials stocks were hurt Friday in particular, after Deutsche Bank (DB) confirmed that it is negotiating with the U.S. Department of Justice to settle a $14 billion civil claim resulting from an investigation into its sales of mortgage-backed securities. Shares fell 12% to $13.38, even though the bank says it has “no intent” to accept that figure.
The Dow Jones Industrial Average rose 38 points, or 0.2%, to 18,123.80, while the Standard & Poor’s 500 index added 11 points to 2139.16. Both indexes have fallen, however, in six of the past eight trading sessions. The Nasdaq Composite rose 2.3%, to 5244.57, largely due to Apple’s gain.
“A step-up in volatility doesn’t make anyone comfortable,” says David Kelly, chief global strategist at J.P. Morgan Asset Management.
The smooth summer sailing is over, adds Peter Kenny, an independent market strategist at Kenny & Co. Since Labor Day, there’s been heavy volume on down days, and institutional investors are net sellers in this slide, he says. The odds are greater for a December hike, but that doesn’t mean the Fed won’t move Wednesday, says Kenny.
“The Fed’s in a tough spot,” says Aaron Clark, a portfolio manager at GW&K Investment Management. “The governors want to hike but the window is closing.” The Fed can cry wolf so many times before it loses credibility and dilutes the power of “Fedspeak” in the future. There’s also an important Bank of Japan meeting Wednesday.
A Fed hike Wednesday could be followed by a knee-jerk selloff below 2100 on the S&P 500, says Kenny. That would be a buying opportunity, Clark believes, saying a likely quarter-point hike won’t make a big difference to economic fundamentals.
A relief rally is likely if there’s no hike. But, says Kelly, much depends on how the Fed explains its action or inaction. Ironically, the best outcome for stock markets could be a hike and an announcement that the Fed is likely done for the year. Everyone clear now?
(Source: Barrons Online)