The markets and the Fed

It’s August and the market is sideways.

Given that the Fed, Congress and most traders are on vacation – together with the fact that most earnings and economic reports of note have been published – we’re now into the traditional drifting summer market mode.

In terms of this drifting, it may be hard to see how this part of the year is different from the rest we’ve experienced so far. So far, according to the fine troops at Bespoke Investment Group, our 2015 trading range remains the narrowest in history. The S&P500 Index, which is up over 50% in the last three years, has gained only about 2% this year…so far.

As of 7 August, the US crude oil price has dropped for the sixth straight week, gold has now moved lower for seven weeks running and the Dow completed its seventh losing session in a row. In the case of the Dow, its drops (and gains) really tell us very little about the overall stock market. It says more about how the Dow has perhaps, outlived its relevance as it’s overly affected by the moves in a few of the 30 companies in the index. We saw that play out Thursday.

Disney, which had been the best Dow performer this year prior to reporting a drop in subscribers at ESPN, closed Friday at about $109/share. It had closed Tuesday at $121/share. That drop, which still left Disney as the Dow’s third-best performer for the year, represented around 120 points of the Dow’s losses this week.

My point is, moves in the Dow are not necessarily representative of what the broad market is doing. Watch the S&P500 instead. While not typically moving as dramatically on a daily basis, it is the main index used by global money managers in tracking and evaluating our markets.

Rolling correction

The undercurrent about the imminence of a stock market correction continues. Seems to me that, as has been indicated by the overall lack of market movement this year, we’ve been having a correction taking place right under our collective noses in the daily course of the markets.

Even though the overall market is sideways, about a third of the 30 companies in the Dow Industrials are off close to 20% from their individual 52 week highs. Another eleven of them are about 7% to 14% down from their highs. The S&P500 has about half its component companies lower by at least 10%.

This sort of correction-in-place may be why we haven’t seen a wider-ranging one occur as yet.

What about the Fed and rate timing?

The release of the July payrolls report on the 7th had all the usual anticipatory financial media caterwauling about “the most important report of its kind ever” (that’s since the last one and until the next one, I think…). Its publication provided little of the defining data some had hoped for. It did, however, reinforce the likelihood of the Fed raising rates for the first time since 2006 when the Fed Open Market Committee next meets on 16 and 17 September.

The Fed has said it’s looking for further improvement in the labor market in order to start raising rates. For 22 weeks running, initial unemployment claims have remained at levels associated with improving labor markets; levels not seen since the early 70s. The national unemployment rate continued at a seven-year low of 5.3%. This all suggests to me that continued hiring is much more likely than layoffs and, with that, the high likelihood of that rate move.

Even with a Fed raise in rates, indications are the level selected will still be below the prevailing core annualized consumer inflation rate of 2.3%. So, interest rates becoming less low over the foreseeable future aren’t a long-term concern.

However, my buddy Russ Koesterich, Global Investment Strategist at BlackRock makes a good point – and notwithstanding my truly insightful rolling correction comment. This past week he said, “If you look at (stock) markets in and around the Fed tightenings, you generally get a 5% to 10% correction”. Either way, it’s not a precursor of a return to the depths, by any means.

If you believe something like a correction can happen, it’s all the more reason not to be discomforted/upset/freaked by it if and when it happens.

Successful long-term investors should never be surprised when/if you’re surprised by the market.

Cheers!

Mike

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