US equity markets stabilized at the close of last week as investors prepared for this week’s long anticipated FOMC meeting and announcement scheduled for this Tuesday and Wednesday. On Friday of last week, a quad-witching, prices slipped modestly as expiration related volume surged. The Nasdaq, still benefiting from Apple’s resurgent trade higher, fared best, losing a mere 0.10%. The S&P 500 and Dow Industrials gave back .38% and .49% respectively. NYSE volume rose a dramatic 41.81% while Nasdaq volume jumped 50.87%. Near term market trend remains “uptrend under pressure.”
Though this week’s FOMC meeting and announcement will certainly take center stage, few have any clear indication of what the Fed will actually do. Most with an opinion believe the FOMC will keep rates unchanged coupled with an assessment of the current economic conditions that a move in rates is not far off. As we have discussed at length, our economic data heading into this meeting has been mixed. The glints of insight we have been able to harvest from Fed officials in recent weeks have also been mixed though I would have to say that, on balance, the tone has shifted to modest and gradual tightening.
The 10-year closed on Friday with a yield of 1.70% and though the odds of a rate hike are no more than 20% this Wednesday according to futures pricing in Chicago, markets are telling us that they are expecting a move sooner rather than later. I would suggest that many investors would like to see the Fed get this rate move out of the way. Markets have ticked lower in recent weeks and in so doing have allowed for a less dramatic sell off in the event Fed does act on Wednesday to raise rates 25 bps. If the Fed stands pat, does nothing on rates and attempts to jaw bone markets into believing they are serious about tightening at some point in the future, markets will likely tick higher and in the process once again push equity market valuations further into the stratosphere. Without some moderation in valuations, when the Fed does move, the likelihood of a steeper sell off is very real. That said, I remain constructive on the markets once we get through this particularly challenging period. As you know from my forecasting, I expect the bull market to remain intact – regardless of the near term turmoil and also expect a positive close on the year.
If the FOMC moves on rates on Wednesday, equity markets will likely sell off. If the Fed holds off, Q3 earnings will need to speak to a significant uptick in S&P 500 revenue growth and EPS or we will see markets leg lower over the coming weeks.
Other than the FOMC, this week we receive earnings from Adobe Systems, FedEx and Red Hat. Also of interest is the Goldman Sachs 25th Annual Communacopia Conference in New York City. In short, the first half of the week is relatively light in terms of the economic calendar – away from the FOMC. I will have a note to you on Thursday morning to cover the FOMC and final two trading days of the week.