For those attempting to predict the direction and conviction in the SPDR S&P 500 (SPY) this week, I suggest looking to the formal speeches of several Federal Reserve Bank representatives this week and also the release of the Beige Book of regional economic indicators. Given recently initiated asset purchase tapering action, and a contrasting data point from the labor department, what the Fed-men have to say this week should weigh for the direction of stocks, and so the SPY ETF as well.
The start of Fed asset purchase tapering was announced in mid-December with the latest monetary policy statement. The Fed masterfully measured its action and so limited market reaction, though stocks had already well-weighed the potential cost of rising interest rates. Still, I believe the negative impact of the shift in Fed view was not fully accounted for at the end of the year, for capital flow reasons due to tax consequences tied to selling stocks before the turn of the calendar. Since the start of 2014, the message has been clear, and it is that the outlook for stocks is a little less rosy in this new environment and given the gains of 2013. As a result, the SPDR S&P 500 has declined 1.3% year-to-date, with the SPDR Dow Jones Industrials (DIA) down 1.6% and the PowerShares QQQ (QQQ) lower by 1.9%.
This past Friday, the Labor Department offered an economic data point that contrasted in ugly fashion with the flow of steadily improving economic data. The Employment Situation Report showed a dearth of new job creation, with just 74K nonfarm payrolls created and just 87K net new jobs at private businesses. That is inadequate job creation for an economy supposedly improving, and the result was far short of economists' expectations as well. This, believe it or not, was viewed as good news by the investment community, because despite the question about the economy, it offered hope that the Fed might take it even easier with its shifting monetary policy. Gold and the SPDR Gold Trust (GLD) grew legs to run farther, and the SPY gained ground on Friday and was up 0.7% on the week. The only way this is possible is if investors do not really see significant economic issue but do see easier Fed policy possible, and I believe that is the case.
After the Fed policy shift and the change in Federal Reserve leadership, with Janet Yellen taking over for Ben Bernanke as Chairperson, we noted the hawks grew louder. Richmond Fed President Lacker and Philly Fed President Plosser continued to lead a seemingly growing group warning about the evils of inflation. There was early discussion about a faster Fed timetable, and that served to stymie stocks and the SPY also.
However, given the latest dire data point from the Department of Labor, we wonder what the tone will be this week from the Fed. There are a slew of Fed-men scheduled to speak at various events this week, and it should make for some "must see TV" for econo-nerds.
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Day of Rest
More importantly, though, the tone of the discussion matters for stocks and the SPY. If there is some toning down or even mention of the fact that asset purchase tapering remains data-dependent, it supports stocks and the SPY and relieves some of the recent concerns of the market about the pace of change in Federal Reserve policy. Investors will want to follow the timeline set forth here and take note of tone, because it is driving capital flows and affecting market expectations.