Mixed Messages and the Q4 Stock MarketOctober 5, 2015 3:29 pm
Talk about mixed messages!
First there is the economy itself. For most of the year, the data has been positive (housing, labor, consumer spending, credit availability, inflation, etc.). However, it is not unusual for a negative indicator to be released alongside a positive one, throwing doubt as to the direction or pace of the recovery. The first week of Q4 the seeds of doubt were sown by a disappointing jobs report (far fewer jobs added than expected, lower revisions to the two previous months and a drop in the participation rate) and a tepid Institute for Supply Management (ISM) Manufacturing Index (barely in expansion territory). Is the economy strong enough to withstand selected bad news, as one camp believes? Or is weak data sending alarms that tell us more bad news is to come? Mixed messages mean competing opinions each have a voice.
Then there is Janet Yellen, Chair of the Federal Reserve, who waffled during her September press conference following the announcement that the Fed was standing pat on interest rates. After telegraphing throughout much the year that the Fed intended to start raising interest rates in 2015, Yellen inserted an international factor into the equation, confusing investors. While the US economy appeared to be strong enough to withstand adverse effects from modest interest rate increases, the rest of the world apparently was not. What remained unclear was how important the global economy would be in the timing of interest rate increases. Several subsequent speeches and interviews by members of the FOMC have not completely quelled market angst over the Fed’s intent.
And finally, the markets themselves are sending mixed messages. The ten year Treasury note started the quarter falling below 2%, projecting concerns that the US economy might not be as strong as previously believed. Yet the stock market (S&P 500) rose 1.43% on same Friday that the weak jobs number was reported. After the Fed failed to raise rates in September, the stock market revolted with a pullback that many interpreted as a message confirming rising rates were no longer a threat. But those same markets celebrated the release of September’s lousy jobs report, rallying on the hope that the economy was weak enough to extend the Fed’s easy monetary policy.
Investors are understandably confused. When information on one day is reversed the next day, or when side-by-side data can be construed as either bullish or bearish, and when new considerations and concerns keep popping up, there are often few easy, definitive answers that can lead to confidence in investing.
There is the old adage that markets don’t like uncertainty. Mixed messages feed that uncertainty by creating doubts and limiting the amount of verifiable information investors like to have when placing trades.
Imagine that you knew positively that the US economy was going to grow by 2.5% this year and by 3.0% next year. And what if the Federal Reserve published its rate increase schedule a year in advance? You could place your trades with more conviction, as you would likely feel far more confident about which asset classes could perform well.
Volatility can be seen as a psychological story, with messaging playing a huge role in determining the sentiment behind market fluctuations. Too much competing and conflicting communication can result in an increase in volatility. That is what we saw in August and September: lots of issues without answers and too many contradicting or ambiguous themes.
he fourth quarter many of the economic stories from August and September will still be in play, but some of them may die down in intensity while others may find emerging consensus. Here is what we are hoping for during the fourth quarter:
Going into the fourth quarter many of the economic stories from August and September will still be in play, but some of them may die down in intensity while others may find emerging consensus. Here is what we are hoping for during the fourth quarter:
- Clarification by the Federal Reserve on the importance of the global economy in reaching its interest rate decisions.
- Improving jobs numbers that make September’s report an aberration, alongside continuing strength of the US consumer.
- Evidence that recent structural reforms and stimulus in China are filtering through its economy.
- Ex-energy earnings reports that materially beat artificially low estimates.
- Technical analysis that shows a bottoming process for stocks and an increase in volume and breadth on up days.
- Political agreements that raise the debt ceiling and fund a long term budget deal.
While this may be a lengthy wish list, even if the messaging for each indicator moved only partway towards clarity or improvement, there just might be enough certainty to settle the markets. And after the late summer’s fickle market moves, a little more stability would be warmly welcome.
The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Betsey’s opinions and comments expressed on this site are her own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.