It’s hard to determine whether the two-day run in the S&P 500 is a sign of an emerging “blow-off” top of the market, where a frenzied rally gives way to several months of weakness (lately, weakness has been measured in hours and minutes, rather than weeks or months), or if it’s the sign of investors growing more comfortable with the notion that the Fed’s exit from its zero-interest-rate policy that has lasted for several years isn’t such a bad thing, and that the economy can handle it.
Certainly, markets have seen two-day rallies of this magnitude before, and they’ve also seen two-day reactions to the Fed before. The last few minutes – where the S&P added 7 points in a flourish – may have been algorithm-related, or more likely the result of dealers having to buy shares in order to get right with their options exposure. (They’re trying to remain what’s known as “delta neutral,” and the sudden moves in the market exposes them in a way that they’d prefer not to be – buying stocks helps them offset that, especially when Friday is “quadruple witching” day, the day when options on single stocks and futures expire. This type of action would not likely be seen when quad witch isn’t an issue).
Janet Yellen went with a split-the-baby calculation that allowed her to keep the “considerable time” phrase, yet still note that the Fed’s plans are to be “patient” and to plan on raising rates after a “couple” of meetings. She even defined the phrase “a couple” when asked for clarification by a New York Times reporter. It means two, so that’s been cleared up. For meaning of a “few” or “several,” we’ll have to wait until the Fed’s next press conference.
Markets like to tie themselves in knots ahead of Fed decisions. Instead of landing on what’s expected, at times of volatility investors instead go in the other direction and start to consider all sorts of wild scenarios on what the slide-rule committee might do instead. But the outlook for the Fed’s statement should be pretty straightforward: the Fed is likely to go with what the market expects, and remove its phrase talking about keeping rates at rock-bottom levels for a “considerable time,” as it has no reason not to.
Sure, the decline in oil and the turmoil in Russia would be market-friendly reasons to stick with the current statement. But that would undermine the Fed’s assessment of the economic expansion, comments from officials, and expectations from investors for rate increases that, language aside, are still more than 6 – if not 9 – months away.
It’s time to pause and take stock of the effect of the oil slump and dollar rise on markets, rather from just marveling at it. Market-watchers tend to look at one asset and attempt to use it as a guide for what will happen in another.
It’s not enough to say that lower gas prices are good for the consumer. The wider high-yield spreads, particularly those sold by energy companies, serve as a warning for equities. The spreads narrow the risk premium between corporate debt and stocks and make the equity market look a bit less attractive.
What do we call the moment when the Russian ruble and a barrel of West Texas crude intersect? How about the Putin death cross? (Credit to Reuters Americas markets editor Dan Burns on this one).
The price of crude plunged through $60 a barrel late on Thursday and headed down through $59. Before long, the number of rubles a dollar can buy will be greater than the price of oil (no, this isn’t a perfect analogy, as we’re dealing with two currencies and a commodity, but let’s go on anyway).
The market’s gyrations are a bit more than many people want to handle this time of the year, but it’s a time when stupid stuff happens, and lack of liquidity combined with concerns about the world economy are raising questions that, essentially, seem like the same question: Has this equity-market surge come too far, and are we due for the “big” Stay-Puft Marshmallow Man-sized thing that everyone has been anticipating since, well, more than two years now?
That is, energy stocks have been smacked around badly along with the price of oil (soon to fall below the Russian ruble!), and the weakness in some of the attendant industrials – pump manufacturers and the like – has people talking a lot about transference effects.
A bit of tumult has entered global markets as the year comes to a close, with various reasons proposed for the gyrations that we’ve seen in Greece, Japan and China in recent days. Some are linked to fundamentals in those specific nations. The rest are due to reduced liquidity. Speculation has heated up over whether the Fed is going to remove the “considerable time” language that has been in its statements for, well, considerable time, as it relates to monetary accommodation.
Reuters recently reported that new Cleveland Fed President Loretta Mester believes that the Fed’s “communications need to be adjusted based on what we’ve seen in the economy.” But then again, she says she’s more optimistic than most of her colleagues – Dennis Lockhart of Atlanta says he’s not in a rush to change things.
Don’t expect the selling in the energy sector to end anytime soon. With tax loss selling dominating the rest of the month, the energy stocks, which have been the worst performer this year in the Standard & Poor’s 500, are slated to perhaps lose even more ground. That’s particularly true as the price of oil continues to decline. (We are right now eagerly awaiting the moment when the Russian rouble crosses the price of oil, an occurrence that would’ve seemed unfathomable even just two months ago.)
Nicolas Colas of BNYConvergex points out that 8 of the worst 12 stocks in the index this year are energy companies. With capital expenditure plans unclear, and with earnings outlook severely damaged by the drop in the commodity, short interest has gone through the roof in these names.
The next few weeks will bring a few analyst meetings out of some of the bigger industrial companies, including Dover Corp. The company is expected to hold a confab Monday to discuss where things stand this year, particularly as it has a 36 percent exposure to the energy industry through businesses that produce equipment for the gas and oil extraction industries – pumps and other such equipment.
Dover has been pretty optimistic for some time on this front, with its annual report last year boasting of global expansion and expectations that North America would bring new opportunities as well.
The meaningful part of the year is drawing to a close (near as I can see it, there’s tomorrow’s jobs report, the Fed meeting in two weeks, and, yep, that’s about it), and as we head into the silly season for happenings in our markets, here’s a laundry list of oddball things to consider:
This is not going to materially affect the Fed in one direction or the other. The recent inflation data and the plunge in oil prices has some smart people (and some overconfident ones) thinking the Fed is in no way going to raise rates in 2015, but three consecutive quarters of above-trend growth, which is where we’re headed, won’t continue to justify a zero-bound interest rate. It just won’t.