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After Record High, Markets Stumble


The market took a breather yesterday after establishing a record high close for the S&P 500 in the prior session. For most of the day, the Open Economy stocks dominated the top 20 percentage gainers, and several enjoyed that status at the closing bell, including Norwegian Cruise Lines (NCLH) and Live Nation (LVY).

Real Estate and Energy endured the biggest loss.

It was clear even when the market was higher. There was no ‘oomph,’ which has been missing all week. A part of that is typical summer trading with a lot of folks either away, or simply taking a break and spending vacation time in the kitchen or the backyard.

So, the session ended in a shallow sea of red.  And I want to unpack that.

S&P 500 Index

-0.44%

Communication Services XLC

-0.28%

Consumer Discretionary XLY

-0.47%

Consumer Staples XLP

-0.79%

Energy XLE

-1.15%

Financials XLF

-0.04%

Health Care XLV

-0.33%

Industrials XLI

-0.26%

Materials XLB

-0.29%

Real Estate XLRE

-2.05%

Technology XLK

-0.12%

Utilities XLU

-0.30%

 

What Did the Fed Say?

Although equity indices hit it off with highs early in the session, it was clear the release of the Federal Open Market Committee (FOMC) minutes triggered selling.

The statement was dovish, but it may not have gone far enough to introduce further accommodation measures. Wall Street wants several tools and new objectives:

  • Aggressive forward guidance
  • Yield curve controls
  • Negative rates

The Powell Fed continues to push back against calls for negative rates, but it may be warming up to other measures. There is no doubt the September meeting could introduce those tools. 

I am not sure to what degree the Fed would take action that would rally the stock market, but Powell has put Main Street’s economic progress – especially in under-advantaged communities – high on his agenda.

Wall Street’s knee-jerk selling is not unlike what we saw a couple of meetings ago when Powell would not have elaborated on yield curve caps. Back then, it was a lot more severe. Every time Powell & Co. communicates about policies and processes without saying straight up that there will be more divisive action, the market will groan. 

FOMC Statement

I pulled selective items from the FOMC meetings. The entire report can be found with this link: https://www.federalreserve.gov/monetarypolicy/fomcminutes20200729.htm

Economic Bounce Slowing

Total nonfarm payroll employment expanded robustly in June, as it did in May, but the gains in those two months offset only about one-third of the jobs lost in March and April. The unemployment rate moved down further to 11.1 percent, but it continued to be far above its level at the beginning of the year. The unemployment rates for African Americans, Asians, and Hispanics declined, on balance, over the past two months but remained well above the national average. Both the labor force participation rate and the employment-to-population ratio increased further in June. Initial claims for unemployment insurance benefits continued to decrease, on net, through the middle of July, but the pace of declines had slowed in recent weeks. In addition, weekly estimates of private-sector payrolls constructed by the Board’s staff using data provided by the payroll processor ADP, along with some other high-frequency measures—such as employment at small businesses and job postings—suggested that employment gains had slowed since mid-June but likely were still strong.

Next Rate Hike

The market-implied path of the federal funds rate shifted down modestly over the intermeeting period. The corresponding path implied by responses to the Open Market Desk’s Survey of Primary Dealers and Survey of Market Participants also fell, as the probabilities placed on rate hikes next year and in 2022 declined. Market pricing suggested that the federal funds rate was expected to first rise above the current target range in 2024.

Broadening the Toolbox

Participants continued their discussion related to the ongoing review of the Federal Reserve’s monetary policy strategy, tools, and communication practices. At this meeting, they discussed potential changes to the Committee’s Statement on Longer-Run Goals and Monetary Policy Strategy. Participants agreed that, in light of fundamental changes in the economy over the past decade—including generally lower levels of interest rates and persistent disinflationary pressures in the United States and abroad—and given what has been learned during the monetary policy framework review, refining the statement could be helpful in increasing the transparency and accountability of monetary policy.

Assumed Congress Would Keep Helping

Those factors included the increasing spread of the coronavirus in the United States since mid-June; the reactions of many states and localities in slowing or scaling back the reopening of their economies, especially for businesses, such as restaurants and bars, providing services that entail personal interactions; and some high-frequency indicators that pointed to a deceleration in economic activity. Substantial fiscal policy measures—both enacted and anticipated—along with appreciable support from monetary policy and the Federal Reserve’s liquidity and lending facilities were expected to continue bolstering the economic recovery, although a complete recovery was not expected by year-end.

Conclusion

I cannot say I was surprised, but the financial media was tripping all over itself, saying the inevitable decline has begun. It’s the 120th time they made this prediction, but I’m told they are willing to predict the correction 1,200 more times before throwing in the towel – and that will be the sell signal.  LOL!

Portfolio Approach

We closed out two positions with hefty gains in the Hotline Model Portfolio, mostly because some early indicators signaled near-term tops, altering the risk-reward ratio. I have no problems taking monster gains at any time.

Today’s session

Economic Data

Initial Jobless Claims

1,106,000 from 971,000 is the largest weekly increase since March.  Wall Street was looking for a decline to 923,000.

To see the chart, click here.

Initial jobless claims offset by sharp decline in continuing claims to 14,844,000 from 15,480,000.

To see the chart, click here.

Pandemic Assistance climbed to 542,000 from 489,639

Although continuing claims declined I hope Congress gets this SOS before it gets louder and more difficult to address. 



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