After a two-day post FOMC rally, US equity markets traded lower on Friday on contracting volume. The Dow Industrials gave back 0.70% (129.23 pts) while the S&P 500 fell 0.57% (12.39 pts) and the Nasdaq Composite slipped 0.63% (33.77 pts). Volume on the Nasdaq contracted by 5.53% from Thursday’s pace and slipped on the New York Stock Exchange by 5.53%. On Friday, US equity markets retrenched and in the process took back more than half the gains registered in the previous two trading sessions. Friday’s drift lower however did not change the near term technical outlook for equities – confirmed uptrend.
In fact, in spite of the turbulent week, the Nasdaq managed to a post a gain of nearly 1% on the week. In the broader picture, the Dow Industrials closed on Friday 404.00 points or 2.16% below their 52-week high established on August 15th. Roughly a week following, the Dow Industrials set their 52-week high, the S&P did as well on August 23rd, closing at 2,193.81. Friday’s closing was 1.35% below that. In short, we have witnessed a significant uptick in volatility and a sharp pullback in prices that was largely offset by the FOMC announcement last week.
In my view, US equities remain compromised and prime for additional weakness in coming days and weeks.
By my count, there are no less than twelve scheduled appearances by Fed officials this week. Obviously the most important of them will be Janet Yellen’s talk on Thursday at 5:10 PM EST – after markets close. Given the proximity of last week’s FOMC announcement in regards to interest rates and Chair Yellen’s press conference, I suspect this week’s full frontal by the Fed will be an attempt at regaining a degree of street cred. It may seem as though I am being a bit flippant or disrespectful in underscoring the concern over Fed credibility but it does not come out of context. If you type “Fed Credibility” into your search bar you will see a theme. On my computer the results for that search total over 10 million. Increasingly, the Fed’s inconsistent attempts to steer market expectations and apparent jawboning to move markets without actually raising rates has left investors and traders a bit weary and certainly skeptical. Even as far back as March 22nd of this year, Bloomberg published an article entitled: “The Fed’s Credibility Dilemma” in the Bloomberg View column.
A summary of this week’s Fed speak will almost certainly outline the case for a move in rates, if economic conditions warrant it, after the election in December. In the meantime, we will hear stridently varying takes on our current economic health, the importance of continued robust employment growth, a need for inflation target adjustment/achievement, a focus on sub par and incremental wage growth and a meaningful nod to the global economy, which does merit some concern.
Apple cart 2.0
In my August 11th note entitled “What will upset the apple cart” I suggested a potential flash point in the geo-political landscape that could trigger a an uptick in volatility, coupled with a move lower in prices, was the potential for an escalation in the simmering conflict in Ukraine ahead of the September elections:
“Geopolitical risks to global market stability have the potential to emerge as a result of renewed saber rattling by Russia in Ukraine ahead of Russian elections in mid-September. Cynically, I suspect that a small tactical military engagement ahead of elections may prove to be precisely the distraction and political electoral motivation that Putin needs at a time when the Russian economy is in dire shape.”
That did not materialize. However, the Syrian civil war, ongoing conflict and the very same actors could very well be the trigger that takes markets another leg lower. Keep a very close eye on that variable.
Other than the Fed speak-centric week, post FOMC announcement, earnings and economic data should keep investors busy. On the earnings front mega-cap issues Pepsi, ConAgra, Nike, Costco are expected to report this week. Today, New Homes Sales will dominate the narrative. Tuesday the Case-Shiller HPI, PMI Services Flash and Consumer Confidence will take top billing. Wednesday, keep an eye out for Durable Goods and the EIA Petroleum Status Report. The EIA Report on Wednesday is of particular importance given the OPEC meeting in Algiers on the same day. You will hear from me on Thursday morning for a closer look at what the conclusion of the trading week has in store.