This week was an overall risk-off environment, as US stocks lost 1.8% and foreign stocks down 2.7%. Meanwhile Gold, Treasuries and the US Dollar found some demand. September has historically been the worst month for stocks, and Ryan Detrick astutely points out that this last week has historically been one of the worst weeks of the year.
The weakness was broad based across most sectors. Only Utilities closed positive for the week. Health Care, mainly Bio-tech, has been a drag ever since the May highs. It’s concerning to see one of the leading sectors in a bull market suddenly turn into a laggard. But markets are cyclical in nature. They go against our natural tendencies to want to go with what is working. It’s possible that this under-performance continues into the late cycle stage. But that doesn’t mean there won’t be bargains in individual companies inside the sector.
As all four major averages are below their 50 and 200 day moving averages, it’s prudent to be cautious in the near term. The St. Louis Fed Financial Stress Index has elevated due to the recent volatility, but is still below normal and well below the levels seen in 2008 and even 2011.
Even the yield curve has flattened over the last 12 months or so. As short term yields start to pick up steam in response to the nearing Fed Funds rate hike. Though yields remain far from an inversion which has done a good job at predicting impending recessions.
Most of the weeks economic data came from overseas. However on Friday, final quarter over quarter US GDP came in at 3.9%. Which was slightly better than the 3.7% estimates.
Fed Chair Yellen spoke on Thursday and again reiterated the likelihood of an initial rate increase before year end. She states that the Fed wants to get ahead of the curve before inflation picks, because if they wait too long they may have to tighten more quickly in response and that could disrupt financial markets. The Fed has consistently stated that they will maintain a very gradual pace of rate increases. And this is more important (and beneficial to equities) than the actual timing of the first.
It’s also possible that the market has already priced in the first increase for them. USD has increased over 20% in the last year, credit spreads have widened and the S+P 500 has fell some 12% already.
For next week…
More important data on tap for next week: Consumer Confidence on Tuesday, China Manufacturing on Wednesday night and US NFP employment report on Friday.
It’s difficult but investors should try to avoid headlines and focus on data. Low recession odds and accommodating monetary policy has generally been beneficial for stocks. 3rd quarter earnings will begin soon and the bar has been set quite low. If earnings can get back on track that may help provide the necessary catalyst for equity markets.
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