Friday’s erratic trading, in many ways, reflects much of what we have come to expect from equities over the past several weeks. Though US equities managed an incrementally positive close across the board, it was a wild ride. By session’s end the S&P 500 and Nasdaq composite added a fractional 0.2% gain while the Dow Industrials closed 0.22% higher. Volume contracted on both the Nasdaq (-9.92%) and New York Stock Exchange (-8.21%).
Friday’s trading session started on positive footing with equity prices higher by roughly 1% on the Nasdaq but it did not last. The Nasdaq closed below its 50 DMA on Thursday for the first time since September 9th. A negative reversal, effectively took all the air out of markets. That reversal was fueled by several economic data releases and by a speech given by Fed Chair Yellen.
China reported an unexpected slump in exports for the month of September (-10%) on Thursday but Friday reported the first monthly increase in factory output in nearly five years. Closer to home, consumer sentiment as measured by the University of Michigan, dropped an unexpected 4% to 87.9. September’s retail sales rose in-line with expectations, 0.6%. In short, the data we received at week’s end was mixed.
More importantly for investors on Friday was the speech given by Fed Chair Janet Yellen at the Boston Fed Conference. After describing the current US expansion/recovery as “not-so-great”, Chair Yellen went on to discuss the merits of considering running a “high pressure” economy. Many on the street interpreted the signaling to mean that the Fed is increasingly less likely to raise rates until the point in time in which inflation forces it hand – even if that means well above the current 2% target and runs the risk of igniting an inflationary spiral down the road.
Naturally, given all the conjecture and predicting the street has been consumed with in regards to forecasting the next move in rates, Chair Yellen’s thoughtful nod at altering expectations for a move in rates represented a considerable departure from expectations. In fact I would argue that her speech effectively reset the table on rates for Wall Street. I interpret the talk given by Chair Yellen on Friday to mean that any chance of a rate hike in 2016 is increasingly remote.
From Japan to the EU and now the United States, monetary policy without complimentary fiscal policy has its limits
You would think that the dovish stance taken in Chair Yellen’s talk would have propped up equity prices on Friday but it didn’t. As we have discussed, accommodative monetary policy as executed by the Fed and other central banks around the globe is increasingly becoming less effective at triggering demand and/or the expectation for it. From Japan to the EU and now the United States, it is clear that monetary policy without complimentary fiscal policy has its limits as I discussed in additional detail in last week’s article in Salon.com http://tinyurl.com/zj8nw5z. Markets on Friday actually slumped after Chair Yellen’s speech as a result of the fact that it is becoming increasingly clear that the Fed has done what it can and that at this point in the cycle fiscal policy is needed.
Earnings of note this week include Microsoft, Netflix and Domino’s Pizza. Expect additional corporate news from Tesla, Facebook and Ulta Beauty. Fed speak dials back this week as investor rotate their attention to earnings and economic data.