Let's Get This Party Going! Fed Reserve Decision May Provide Fireworks

by: TD Ameritrade


Apple’s better-than-expected results after the bell is providing some fuel today, many analysts say.

The Consumer Confidence Index this month reflected the markets this week—flat.

Crude oil prices may be creating major headaches for some analysts as they continue to slide amid over supply.

By Kevin Hincks, Sr. Specialist, Trader Education Host, and Swim Lessons host.

Traders appear to be mostly standing still in the early going as they usually do ahead of today's closely watched interest-rate outcome from the Federal Reserve.

The three major benchmarks are heading higher slowly, but with a little more oomph than yesterday's yawn of a trading day when the trio barely moved. Apple's (NASDAQ:AAPL) better-than-expected results after the bell is providing some fuel today, many analysts say. Yesterday, the Dow Jones Industrials (DJIA) settled at 18,473.75, off 19.31 points, or a mere 0.1% while the S&P 500 (SPX) inched up only 0.1%, or 0.70 points, to 2,169.18, thanks to gains in materials and industrials that edged out losses in telecom and utilities. The Nasdaq Composite Index (COMP6) peaked at 5,110.05, up 12.42 points, or 0.2%.

The ties between the SPX and oil also appear to have been severed Tuesday after the September WTI crude (CLU6) slid by $0.21, or 0.5%, at its lowest level since late April, at $42.92. Why? It could be because more investors are worried about the disconnect between supply and demand. The American Petroleum Institute reported late yesterday that there was an 800,000-barrel draw in crude oil inventories for the week to July 22, according to OilPrice.com. But an important U.S. measure of strategic inventories at Cushing, Okla., however, were up by 1.4 million barrels. Another set of key numbers from the Energy Information Administration will come out later this morning. Though the two tend to differ slightly, last week they ran in tandem.

Let's recap the economy: Interest rates are at historical depths; crude oil prices are also touching bottoms; the markets are at record heights; employment is low. Looks good, right?

Yet, yesterday's on-again/off-again trading activity appeared a bit jittery. Perhaps it's because of all the distractions out there what with a horde of earnings (320 results today, 466 tomorrow) and economic reports, the Democratic National Convention and the anticipation tied to the Federal Reserve's decision on interest rates, but shouldn't things be a little more relaxed?

It may all shake out after the Fed releases its decision on interest rates, which most of the futures world thinks will be a no-move verdict, according to the CME FedWatch tool. It's the rhetoric surrounding the ruling that may move the markets in either direction and it's likely that traders will be dissecting Chair Janet Yellen's words for some hint on what's ahead.

Figure 1: PRICING PULLBACK. The S&P 500 (SPX), plotted through Tuesday's close on the TD Ameritrade thinkorswim platform, straddled positive and negative territories throughout a yawn of a trading day before sneaking higher at the close. Data source: Standard & Poor's. For illustrative purposes only. Past performance does not guarantee future results.

How Confident Are Investors? Apparently not at a point to cheer about. It seems that most investors are at that cautiously-optimistic stage, according to the Conference Board. The Consumer Confidence Index this month reflected the markets this week-flat. It held steady in July at a reading of 97.3 that nearly mirrored a solid 97.4 posting in June. What is more telling, according to Wells Fargo, is the consumer spending intentions. It expects consumer spending "to be a key support to (NYSEMKT:GDP) growth but perhaps not as robust" as the 4.6% gains Wells Fargo is forecasting for real consumer spending in Q2. "Anything from geopolitical events to equity market sell-offs has the potential to erode consumer confidence and, in turn, begin to weigh on real consumer spending," Well Fargo said in a report. "Over the course of the next year growth will be a delicate balancing act between consumers supporting growth, soft business investment and a shock that could result in slower growth."

Does Eating Out Retreat = Recession? The Q2 earnings results of fast-food and casual dining titans have been anything but hardy-think Starbucks (NASDAQ:SBUX), McDonald's (NYSE:MCD), Chipotle (NYSE:CMG) and Taco Bell (NYSE:YUM), for example, which all missed Wall Street expectations-and that spells trouble, with a capital T, for the entire economy. Why? Because, according to one analyst who has charted the ebbs and flows of the restaurant industry for the better part of two decades, these abysmal Q2 results lead him to "confidently believe" that the restaurant industry is the "harbinger of the U.S. recession in 2017." He took a broad brush to a sweeping downgrade of the restaurant sector yesterday that took down many stocks after MCD's results ate into the Dow. Restaurants, he said, "have historically led the market lower during the three- to six-month periods prior to the start of the prior three U.S. recessions." Chew on that.

More Worries for Oil. Crude oil prices may be creating major headaches for some analysts as they continue to slide amid over supply. The real problem, according to OilPrice.com, is the state of oil and fuels fundamentals. "Despite the fact that driving season is in full bloom, demand for gasoline has not risen as much as expected," the site says. "As soon as next month gasoline demand is expected to start slowing down as driving season draws to a close and refineries, which as of July 15 were operating at 92.3% of capacity, may have to start shutting down for seasonal maintenance earlier, if inventories continue to build up." Some analysts are predicting that crude oil prices could fall to $30 a barrel. The EIA numbers out later this morning may offer more clarity.

Figure 2: Economic Agenda. This week's U.S. economic report calendar. Source: Briefing.com.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.