Markets are Daring the Fed to Move on Rates

Markets moved with alarming though not entirely unexpected efficiency lower yesterday and in the process provided yet more fodder to my call of “caution” over the past six weeks. The Dow Industrials, S&P 500 and NASDAQ all lost greater than 2% on a day that saw the S&P 500 post its worst one day performance since February of 2014. The NASDAQ was the leader lower losing 2.82% on the day or 141.56 points – closing at 4877.49 and on the low tick of the day. The Dow Industrials lost 2.06% or 358.04 points – closing at 16,990.69. I suggested, in a recent conversation that the DOW Industrials would register a “16” handle in the very near term though I honestly thought I may take more than a single trading session to do it. The NASDAQ’s shedding of the 5000 level was a forgone conclusion given the current dynamics at work in the market.

I find it interesting that our equity markets have been on such a decidedly negative track in recent weeks in spite of the fact that the economy is at a point where it is healthy enough, by most metrics, to manage a move in interest rates by the Fed. Of course much of the volatility being flushed into the market is a result of investor fear of that very normalization after years of zero interest rates. The move lower is also the result of investors looking to remove elevated valuations from holding which is why we have been consistently seeing leading stocks and index P/E’s  contract nearly all summer. The geo-political theatre has always been a source of uncertainty but seemingly rarely more than it is currently. That has exacerbated the degree of uncertainty being priced into markets. Much of these drivers of near term direction can be summed up in a few simply words: concern over global demand.

Yesterday’s economic data releases were actually quite constructive for those looking for continued improvement on that front. Home sales and prices have registered solid performances in the most recent period – providing further evidence that the housing market has remained a pillar of strength in the economy and a closely watched data point in regards consumer confidence and behavior. Weekly Jobless Claims, though a touch higher than consensus outlined yesterday here in the note, remain well within channel at multi year lows on a monthly basis and very encouraging. That said, the path of least resistance remains lower for US equities. As of yesterday’s close, the Dow Industrials are off 7.416% from their closing high. The Dow along with the other major indices closed at their session lows. Expect more price erosion and a likely slip in volume as we head into the weekend.

Today’s economic calendar is sparse. One data point: PMI Manufacturing Index Flash