With the focal point(s) of the stock market appearing to move around a fair amount lately, it is important to keep up with all the issues. By my count there are six worries/concerns at this time including the dollar, rates, the Fed, the state of the economy, valuations, and the election.
Although there have been intermittent moves to the upside at times - especially on an intraday basis - the majority of the action over the last month or so has been to the downside. Perhaps this is simply the traditional seasonal pattern playing out. Maybe uncertainty is the key. But whatever the reason, the action has been sloppy, to say the least.
S&P 500 - Daily
To be sure, the recent surge in both the dollar and interest rates has been a driver. And on the rate front, it is important to recognize that this is not just a U.S. issue. No, bond prices have been falling in places such as Germany and the U.K. as well.
On this front, many argue that the primary issue is the repricing of what I call Fed expectations. By now, most folks expect Janet Yellen's Fed to raise rates in December. But the real question traders appear to be wrestling with is what happens after that?
On one hand, you have Fed Vice Chairman Stanley Fischer, among other Fedheads, saying that there is a risk to keeping rates too low for too long. After all, this was one of the primary causes of the mortgage crisis that occurred a decade ago - and folks haven't forgotten. Comments like this would seem to argue that the Fed knows it is behind the curve and may need to try and play catch-up in 2017.
And then on the other hand, you have the Fed Chair herself issuing what appear to be dovish, cautionary comments the very next day. Lest we forget, Ms. Yellen said in her most recent speech that her merry band of central bankers may allow the economy to run hotter than normal for longer than normal in order to try and create a more "emphatic" economy recovery.
What this means to bond traders is the longer-term inflation expectations will rise if the Fed decides to keep rates "lower for longer." And as you might expect, such expectations cause bond prices to fall and yields to rise. Oh and higher rates means a stronger dollar. Which, of course, has a negative impact on the earnings of multinationals. And so it goes.
Now toss in the uncertainty surrounding the outcome of the election (especially the races for the Senate and the House) and the fact that some big names in the financial markets keep yammering on about valuations and how cautious we should all be on the market, and well, there doesn't seem to be any reason to run out and buy stocks right now.
The good news is that, as I've been saying for some time, the seasonal winds in the market are due to shift in the very near future. And if some of the uncertainties can be resolved, stock market investors could find that they have the wind at their back for the remainder of the year.
I recognize this is not exactly the consensus view right now. But remember, the election uncertainty only has a few weeks left to run before we get the results. And as long as the much feared "Democratic sweep" doesn't occur, then Wall Street will likely move on to other things.
And then if Ms. Yellen can convince folks that the Fed isn't going to steepen the "glide path" of rates in 2017, much of the current uncertainty could easily fall by the wayside. Just a thought...
Current Market Drivers
We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).
1. The State of the Earnings Season
2. The State of Global Economies
3. The State of Global Central Bank Policies
4. The State of U.S. Dollar
5. The State of German/European Banks
Thought For The Day:
Regardless of the color on the screens, try embracing an "attitude of gratitude" today...