For the third time in four weeks, the equity markets ended with losses last week, although at its worst level the S&P has refused to decline by more than 3.5 percent so far this year. This is now the longest stretch for the S&P without a five percent decline (145 days) since the record 173 days feat that finally ended on February 20, 2007.
On the other hand, this streak has been accompanied by volatility rarely seen in the major averages, as for instance over the past 15 sessions, on 11 of them the Dow Jones Industrial Average made a closing move of more than 100 points, and the scorecard so far is five on the upside and six on the downside, as changes of 100-plus points on one day are followed by moves of this magnitude in the opposite direction the following day, leaving investors sort of breathless in both directions. And to make things ever juicier, since the now infamous May 22 prepared Congressional testimony of Fed Chairman Bernanke and his subsequent question-and-answer period before a House panel, the average daily move for the Dow has been 191 points as opposed to an average distance of 110 points before these events.
Last week’s column detailed the confusing and contradictory comments that Mr. Bernanke made in his prepared statement and then in a direct answer to a question, and in addition various Fed regional bank presidents have also come out with statements that are so opposite to each other that one has to wonder if they are looking at the same sets of data and economic releases.
And this past week the market turmoil continued, as the third down week out of the past four was followed this Monday by another Dow 100 point plus advance. It appears as if today’s 2 p.m. release of the Fed’s latest interest rate statement and subsequent news conference by its chairman is only going to cause the volatility and violent turns in either direction to continue as various and sundry Fed watchers, who have been at this game for decades already, will then appear on financial broadcasts and in financial newspapers to give their latest pontifications and reading of the tea leaves as to what the central bank has now put on the table. And each one will come out with pronouncements that are as different from the previous one as the various Fed regional bank presidents have already done, leaving investors in a quandary as to try to divine the market’s next move.
On the other hand, despite all the contradictions presently swirling around, it is an undisputable historical fact that following the past four times that the Fed has raised interest rates, the market rallies an average of 16 percent over the next two years, so it would be comforting to believe that history is about to repeat itself again.
Recent economic reports have been hot and cold, and have produced contradictory market moves as well, but not often in the direction that one would typically think they would, as the old “good news is bad news” and “bad news is good news” syndromes are at work on some days, and then on other days we get the more traditional “good news is indeed good news” and “bad news is therefore bad news” reactions as well, and this has further added to the overall confusion and weakened market patterns over the past four weeks also.
For instance, in the last week alone we saw May advance retail sales increase by more than forecast, helped by a surge in motor vehicle purchases in addition to home building materials, which is obviously a function of the freakish weather patterns that various parts of the country have been subjected to these past several months. And the so-called core sales component, which strips out automobiles, gasoline and building materials, and which corresponds most closely with the consumer spending component of G.D.P., also rose by more than expected. Weekly jobless claims also declined and the May import price index fell as well, and these reports show an economy that one would think is growing without inflationary pressures, which is the perfect scenario.
The market reacted the way one would think it would, namely the Dow advanced by 180 points last Thursday and the S&P made its second-best performance of 2013, trailing only the gains that the market achieved on the first trading day of the New Year back on January 2. But this was not before the Dow underwent two consecutive 100 point or worse declines the prior two days and was actually lower at the start before making this dramatic upside reversal, which reached 250 intraday points from bottom to top. And this finish was the complete opposite of the day before, when an early Dow gain of 123 points ended in a 127 point closing decline, which is a 250 point intraday downside reversal! What is going on here?
Then on Friday the market apparently did not like the fact that the overall May Producer Price Index showed its first gain in three months, May Industrial Production was unchanged instead of advancing as had been estimated, and the preliminary June U. of Michigan Consumer Sentiment Survey declined from a six-year high. This resulted in a closing Dow loss of 106 points.
Just when investors were getting a little nervous over that third lower weekly close in the past four weeks, the new week began on Monday with the Dow ending with a 110 point gain as the June NY State Empire Manufacturing Survey showed its first advance since March and the June NAHB Housing Market Index rose to its highest level in seven years.
All of this extreme volatility appears as if it will be a warm-up for the major event today, when the Fed tells or does not tell us the time-frame for the beginning of the end of their current stimulus program and to what extent the monthly dose of the $85 billion medicine, which consists of $40 billion of mortgage-backed securities and $45 billion of long-term Treasury bonds, is about to be tapered down.
And if anyone can predict how the market is supposed to react, I would like to know, because if past is prologue, the market’s movements are going to be a real barnburner.