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Some hoped that today's slew of economic numbers would give a clear indication of what the Fed might do next week. Unfortunately, the data was mixed, though the key points — August retail sales and industrial production — both came in weaker than expected.
The chance for a September rate hike accordingly dropped — to 12 percent.
Those are pretty low odds.
Markets saw a respectable midday rally, but most of it does not have much to do with the economic data, or with Donald Trump and his economic policy speech. It has to do with Apple and a small group of other tech stocks.
Apple's huge 11 percent rally this week has contributed in a big way to any gains. Remember, the S&P 500 is market cap weighted, so the bigger stocks have an outsize influence on how the index moves. Apple, the biggest stock in the index, has the biggest effect.
Today, Apple is responsible for a more than 20-point gain on the S&P 500. This is significant, since the S&P is only up 21 points.
The perfect storm for Apple: Strong pre-sales, problems for a competitor.
After being on a downward-sloping trend for more than a year, Apple has finally broken out. It traded up as much as 4 percent today and 9 percent this week.
At midday, Apple has already traded 60 million shares, more than twice its average in the past month for a full day.
If this keeps up, Apple will close at its highest level this year.
Markets are down again this morning. Most are content to blame it on crude, down about 2 percent earlier on an IEA report that says the world is very adequately supplied with oil, and that demand (particularly from India and China) will not be as strong as anticipated next year.
But I think there's a bigger problem: the central bankers of the world appear to be shifting their positions. Despite the choppy data, a majority of the FOMC appears to be leaning toward a rate hike in September, despite the fact that the fed funds futures are assigning only a 15 percent chance of this happening. It's bigger than that: you not only have the Fed's Dennis Lockhart and Eric Rosengren trying to argue there is a case for raising rates, you have the ECB standing pat on more QE, and don't be shocked if the Bank of Japan's Haruhiko Kuroda turns cautious on expanding QE when he speaks next Tuesday.
So we now have the next eight days—leading up to the Fed meeting—with much higher levels of volatility than you might expect. You can see this in the VIX curve, which has flattened significantly in the last few days. The cash VIX is roughly 17.0, whereas the October futures contract is 17.6, November 18.6. The cash VIX was only 12 on Thursday.
Marko Kolanovic, who runs Derivative and Equity Strategies at JP Morgan, recently estimated that monetary policy since 2009 has accounted for a gain of 21 percent in Low Volatility Equities (consumer staples, utilities, telecom), a 10 percent gain in government bond indexes, and a 7 percent increase in gold.
A 21 percent gain for a Low Volatility strategy is substantial but would certainly not account for all the gains. The Powershares Low Volatility ETF, a basket of low volatility stocks, is up 75 percent since its creation in mid-2011.
Still, it's a substantial part of the gain. If central banks start "normalizing" policy, Kolanovic believes those gains would gradually go away. For example, if the Fed took three years to "normalize" rates at an even tempo, he assumes the average yearly historical gain in equities (about 7 percent) could be erased each of those three years.
Pity the professional trader, who has to come in every day and put money on the line. You can't help but sympathize.
On Friday, traders went from complacent to a mild panic, from not caring to buying volatility, essentially shorting the market. Then, on Monday, traders reversed and essentially covered their short positions. All in two trading days!
What a ride! S&P futures fell 50 basis points on Friday and were down 30 points pre-open on Monday. They are up roughly 35 points Monday.
An old trader friend of mine called to vent his frustration this afternoon. This is a man who has traded professionally since the early 1970s (with both Merrill Lynch and Morgan Stanley) and traded his own money for the last 15 years.
"How do you trade when the S&P goes down 50 points on Friday, drops 20 points pre-open, then rises 35 points on Monday? How do you trade when one important Fed member says they want to raise rates on Friday, and then on Monday another important Fed voter says they likely will not raise rates?"
The short answer is, you can't.
Where are we? Is this just a modest pullback or the start of a more serious correction?
One problem is that the Fed and the elections are creating cross-currents that make direction a very tough call. In addition to mixed signals from Fed officials, September-October is typically a soft stretch for markets. However, in presidential election years stocks tend to outperform from Labor Day into the November elections. The last seven months of election years tend to be strong, with just two losing streaks (out of 16 elections) since 1952, according to the Stock Trader's Almanac.
One thing's for sure: central banks around the world are becoming more resistant to lowering rates and expanding quantitative easing (QE). There's clearly a rethink about the effectiveness of keeping rates this low for so long. So you not only have the Fed's Lockhart and Rosengren trying to argue there is a case for raising rates, you have the ECB standing pat on more QE, and don't be shocked if the Bank of Japan's Haruhiko Kuroda turns cautious on expanding QE when he speaks next Tuesday.
With so many cross-currents, it's tough to site past precedents. However, May 2013's Taper Tantrum, where the S&P 500 dropped roughly 5 percent over about a month, might be useful. During this period, we saw banks, energy, and industrials outperform, while emerging markets, gold, and interest-rate sensitive sectors like utilities, telecom, and REITs underperform.
None of that is happening today. The market is a mirror-image of Friday, with banks and industrials underperforming, and interest-rate sensitive utilities, telecom, and REITs outperforming after being sold off for a good part of the summer.
Why the reversal from Friday's big down day? The S&P went down roughly 75 points from Friday morning to Monday's pre-open trading—that is a HUGE drop on not much. A little pop would certainly not be a surprise.
Judging by today's action, the markets are convinced that either 1) a rate hike is not coming, or 2) a rate hike will not kill stocks. Interest-rate sensitive names are probably a bit oversold short-term, and a reasonable argument could be made that stocks in general are a bit frothy.
So today's trading does make some sense. Unless the Fed's Lael Brainard, a dove, clearly communicates that she is in favor of raising rates, the betting is that the odds of a Fed rate hike remain low. Fed Funds futures are only pricing in a 21 percent chance of a September rate hike, but it rises to a 57 percent chance for December.
Let's wait until we hear from Brainard later today. Volumes are light.
Well, it's about time. Even by summer doldrums standards, markets had seen a long period of below-average volatility. The Dow last moved 1 percent or more on July 8!
The Fed's Eric Rosengren — traditionally a dove — has reminded everyone that markets are not positioned for a rate hike in September. He has made a case that it could well happen.
Now you see a scramble to put the trades back on. Traders moved to:
Wall Street had been treating Trump's candidacy as a sideshow not to be taken seriously with little chance of victory.
Banking analyst Mike Mayo says in a note to investors Wells Fargo executive pay "clawbacks" should be put in place.
Stumpf would get a big payday to walk from the bank, with millions in severance and stock value if he retires, USA Today reports.