Will weakness in housing, slowing earnings and a slew of Federal Reserve speeches begin to take their toll?
Yes, U.S. markets edged higher on Friday as the macro economic data continues to be mixed at best. Russell and Nasdaq attempted to stage a rally from an oversold position … but from a technical point of view, it was not a good week and this morning we find that markets around the world are in negative territory. (Click here for the latest US market action.)
Investors remain subdued, not finding any compelling reason to commit new money given the very uneven tone of this economic recovery. On Friday, we got housing starts and building permits and while both appeared better than expected, a further analysis revealed that construction and starts are on multifamily units — rentals — and this changes the tone. The University of Michigan reading on consumer confidence came in below expectations, suggesting that higher food and energy prices are taking a toll on Americans.
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Volumes remain well below average as investors find no real compelling reasons to put new money to work here. But, you ask: What about last week's all-time high? That was trading action vs. real long-term investor commitment, as evidenced by the lack of follow through.
By all accounts, many large mutual funds are working to establish more conservative positions, given the erratic nature of the news and what some view as weakening fundamentals. As the Fed continues to tighten and withdraw money from the stimulus programs, it is unknown how the market will react. So, many are now thinking it makes more sense to be play it a bit safe vs. swinging for the fences. Recent Treasury market action only further confirms the caution ahead as buyers pile into bonds concerned that the economic recovery is beginning to stall and if Fed withdrawal continues, where will the growth come from?
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As stimulus is curtailed, valuations are now being questioned — are they too high for current conditions? Will we get real earnings growth to support a move higher? Look, earnings season is over, and although it was not a complete disaster based solely on rock-bottom expectations, recent macro data — industrial production, housing starts, consumer confidence, European economic growth — or lack thereof — mixed reviews on job creation and lower second-quarter guidance by U.S. companies are all causing investors to take a more cautious stance.
And this week, we have a host of speeches by a range of Fed officials.Monday, we get San Francisco's John Williams and Dallas Fed President Fisher appearing on a panel discussion over what exactly is the Fed's role. Former Chair Bernanke will chime in later, detailing the impact on rising asset prices based on the Fed's stimulus programs. Tuesday, we get Philadelphia Fed President Plosser and NY Fed President Dudley discussing the economic outlook for the U.S. On Wednesday, Kansas City Fed President Esther George will discuss banking and the economy. As you can see, there will be no lack of talking points, so expect traders and investors to be paying close attention to try and read the tea leaves and decipher the next Fed move.
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Commentary by Kenny Polcari, director of NYSE floor operations at O'Neil Securities. He is also a CNBC contributor, often appearing on "Power Lunch." Follow Kenny on Twitter @kennypolcari and visit him at kennypolcari.com.
Disclosure: The market commentary is the opinion of the author and is based on decades of industry and market experience; however no guarantee is made or implied with respect to these opinions. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment. The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any financial product, or an official statement or endorsement of O'Neil Securities or its affiliates.