Jackson Hole Meeting to Take Center Stage
The major market indices finished the week little changed on lackluster trading activity. The latter half of August tends to be the peak weeks for Wall Street vacations, resulting in a significant decline in trading turnover.
August 22, 2016
| By Mike Schwager
Performance for Week Ending 8/19/16:
The Dow Jones Industrial Average (Dow) fell 0.13%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 0.03%, the Standard & Poor’s 500 Index (S&P 500) finished off 0.01% and the Nasdaq Composite Index (NASDAQ) tacked on 0.1%. Sector performance was mixed with 5 of the S&P sector groups finishing lower and 5 finishing higher. The Energy sector (+1.96%) was the best performer while Telecom (-3.84%) was the worst.
||Closing Price 8/19/2016
||Percentage Change for Week Ending 8/19/2016
||Year-to-Date Percentage Change Through 8/19/2016
*See below for Index Definitions
MARKET OBSERVATIONS: 8/15/16 – 8/19/16
The major market indices finished the week little changed on lackluster trading activity. The latter half of August tends to be the peak weeks for Wall Street vacations, resulting in a significant decline in trading turnover. Stocks have been stuck in a tight trading range for the past several weeks as investors continue to weigh the vigor of the US economic recovery, the lackluster earnings environment, and elevated valuations against the low interest rate environment and the likelihood that global central banks will maintain ultra-loose policy for the foreseeable future. Over the past 25 trading days the difference between the intraday high and intraday low on the S&P 500 has averaged just 11 points. To put that into perspective, for much of January and February, that same average was in the 30 to 40 point range.
July FOMC Meeting Minutes: Last week the Fed released the minutes from the July Federal Open Market Committee meeting and they offered a little something for both the hawks and the doves. On the dovish side the statement noted that “the Committee should wait to take another step in removing accommodation until the data on economic activity provided a greater level of confidence that economic growth was strong enough to withstand a possible downward shock to demand.” (note: the July FOMC meeting was held before the release of the stronger than expected July payroll report which showed non-farm payrolls gaining 255K after the 292K gain in June – so it’s questionable whether the members still hold this dovish view).
On the flip side, the hawks focused on the following “… some participants viewed recent economic developments as indicating that labor market conditions were at or close to those consistent with maximum employment and expected that the recent progress in reaching the Committee's inflation objective would continue, even with further steps to gradually remove monetary policy accommodation. Given their economic outlook, they judged that another increase in the federal funds rate was or would soon be warranted, with a couple of them advocating an increase at this meeting."
Away from the July meeting minutes, speeches last week from two Fed presidents took on a more hawkish tone. NY Fed president Bill Dudley, who shares a very similar view to Fed Chair Yellen, said the Fed could potentially raise interest rates as soon as next month and warned that investors are underestimating the likelihood of increases in borrowing costs. On Thursday, San Francisco Fed president Williams echoed Dudley’s comments saying that September is “in play” and “every-meeting-is-live.” Williams noted "in the context of a strong domestic economy with good momentum, it makes sense to get back to a pace of gradual rate increases, preferably sooner rather than later...If we wait until we see the whites of inflation's eyes, we don't just risk having to slam on the monetary policy brakes, we risk having to throw the economy into reverse to undo the damage of overshooting the mark...and that creates its own risks of a hard landing or even a recession...I think every one of our meetings should be in play in principle...I definitely think September should be.”
The key in getting better clarity on the forward path of rates will likely come this Friday when Fed Chair Yellen is scheduled to present at the Kansas City Fed Symposium in Jackson Hole, WY. Investors will keep a close eye on her remarks as this forum has been used in the past to communicate policy initiatives. Yellen has been mostly “dovish” toward policy, so any change in tone would likely raise the probability of a rate hike by year-end. The situation however will be very tricky and Yellen will need to “stick the landing” with her comments. With most global central banks in easing mode, an overly hawkish tone could send the US dollar soaring which in turn would put renewed pressure on oil prices, curb exports, and create a headwind for US multinational companies. While Dudley and Williams recent comments could be setting the stage for a more “hawkish” Yellen, fed fund futures, as of Friday were suggesting only about a 1 in 4 chance of a move in September, although a change in December certainly remains on the table (52% probability).
Market View: The path of least resistance for the domestic equity markets should continue to be skewed to the upside. While a pullback in stock prices in the coming weeks certainly cannot be ruled out, a correction in prices would be viewed as healthy as it would help relieve some of the current “froth” in the market and set the stage for a buying opportunity at better prices. From a macro standpoint, the US economy remains healthy, labor conditions continue to improve, the likelihood of a recession remains relatively low, earnings growth is set to accelerate in the coming quarters and interest rates policy is expected to remain supportive of risk assets.
The Week Ahead: The focal point for the coming week will be Fed Chair Yellen’s speech at the Jackson Hole Fed Symposium at 11:00 ET on Friday. The data calendar will be relatively light again this week. Economic reports of interest include July new home sales, July existing home sales, durable goods orders for July, the first revision to second-quarter GDP and the University of Michigan’s August consumer sentiment survey. Earnings season continues to wind down as only 13 members of the S&P 500 are scheduled to report results.
The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.
Wilshire 5000 Total Market IndexSM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.
Standard and Poor's 500© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.
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