Down 2.4% on Friday. Up 1.5% on Monday. Such is life in the stock market these days when the computers think they’ve found a theme. Or rather, when the computers think they’ve found a theme one day and then realize they were wrong the next. Good times.
On Friday, stocks got hit hard as the major indices had their worst day since the BREXIT hysterics. What was interesting is that stocks and bonds both fell precipitously on the same day. And folks, that’s just not supposed to happen.
Remember, when there is a crisis in stocks – you know the type of thing that causes stock indices to fall off a cliff to the tune of 2.5% in a single session – bonds tend to benefit as the fast money flocks to the safety of the U.S. government bond market.
However, this was most definitely NOT the case on Friday. No, both stocks and bonds in the U.S. got smoked at the same time. Why? Because some of the macro masters of the universe working on Wall Street became convinced that the Fed was secretly planning to surprise the market in a couple weeks. Instead of thoroughly telegraphing their plans, the thinking was that Yellen & Co. needed to gain back their lost credibility – and fast.
Exhibit A in the bear case Friday was the fact that the FOMC had hurriedly cued up Fed Governor Lael Brainard for a special speech on Monday. The fear was the Brainard, who is a well-known ‘dove’ (in case you are wondering, Investopedia defines a ‘dove’ as: “…an economic policy advisor who promotes monetary policies that involve low interest rates, based on the belief that low interest rates increase employment. Derived from the placid nature of the bird of the same name, the term is the opposite of ‘hawk.'”), was being rushed to the microphone in order to provide cover for a rate hike at the September 20/21 Fed meeting.
This despite that fact that the Fed Funds futures market was projecting the odds of a September rate hike somewhere in the low 20% zone on Thursday.
Coupled with a very public, very bearish pronouncement by the latest bond king, Jeffrey Gundlach, as well as the recent action seen in the bond markets of Japan and Germany, well, our furry friends in the bear camp managed to convince themselves that the great bull market in bonds was ending – on Friday.
The mantra in the bear camp likely went something like this. The Fed is going to raise rates and the markets aren’t ready. The Fed is going to raise rates and the economy is going to screech to a halt. The Fed is going raise rates and the dollar is going to explode, taking stocks, bonds and commodities of all colors, shapes, and sizes down. The Fed is going to raise rates and real estate is going to implode again. The sky is really and truly falling this time! Run for your lives!!!
However, on Monday afternoon, Lael Brainard did not secretly deliver a message to the markets. She did not prepare traders for a big surprise. No, Ms. Brainard’s speech sounded a lot like, well, all of the other speeches the uber-dovish Fed Governor has delivered recently.
Paraphrasing, Brainard said that the progress continues to be made in the economy, but it would be wise for the central bank to keep rates low. Brainard even counseled against moving too fast urging the FOMC to exhibit “prudence in the removal of policy accommodation.” The Fed Governor even championed the current course, saying, “I believe this approach has served us well…”
Ms. Brainard pointed to risks from outside the U.S. as a reason for continuing to keep rates low. “Downside risks are also present in emerging market economies, where growth has slowed rapidly in recent years,” she said.
I could go on and on, after all, Brainard is an economist! However, it will suffice to say that Lael Brainard did not, in any form or fashion, deviate from her recent views.
In response, stock and bond prices rallied. The dollar stopped going up. And according to CNBC, the chances of a rate hike at the September FOMC meeting got cut in half from Friday’s high, standing at just 15% Monday afternoon.
So, where do we go from here? Frankly, I have no idea. It is still September, which, as nearly everyone on the planet now knows, is the market’s worst month and known for volatility. Oil remains a focal point. Stocks are still overvalued. And the economy isn’t exactly gangbusters at the moment.
Yet at the same time, Janet Yellen’s merry band of central bankers doesn’t appear likely to surprise the markets on the 21st. And with the Fed now in a “blackout period” we won’t get any more incendiary comments from the likes of Bullard or Fischer.
From a technical standpoint (which, in my opinion, seems to matter less and less with each passing algo-induced, idiotic freak-out in the market), the good news is that the really important lines in the sand were broken. And don’t look now, but the S&P 500 currently stands less than 1.5% away from an all-time high.
The question in my mind is if Friday’s dance to the downside was the best dip buying opportunity we will see for the remainder of this seasonally weak period. So stick around, this could get interesting.
Current Market Drivers
We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).
1. The State of Global Central Bank Policies
2. The State of U.S. Economic Growth
3. The State of the U.S. Dollar
4. The State of the Global Bond Market
Thought For The Day:
Wise men talk because they have something to say; fools, because they have to say something. –Plato
Wishing you green screens and all the best for a great day,
David D. Moenning
Chief Investment Officer
Sowell Management Services
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