Markets Continue to Drift Aimlessly In Dull Late-Summer Doldrums

Once again, the market has just drifted aimlessly on very light volume now that the bulk of the second-quarter earnings season is behind us, ahead of the September 18 Fed meeting at which the extent of the tapering of the stimulus program, if any, will be announced. As a result, there was very little for investors to trade upon on any given day, with the result that the major averages made narrow moves with many participants still away as the summer vacation season comes to an end.

The S&P and Nasdaq did manage to break their most recent two-week losing streak last week but the Dow had no such luck as it has now declined for three weeks in a row. If there was a highlight to the most recent period under review, it was the release last Wednesday of the minutes of the latest F.O.M.C. meeting in which investors tried to read the tea leaves in terms of what the central bank’s intentions are going forward. Namely,  when are they going to start to withdraw the current $85 billion a month in purchases of long-term Treasury and mortgage-backed securities.

Unfortunately, their statements did nothing to give investors further insights into what the committee’s future intentions are as they were basically a rehash of well-worn territory. In essence, what was revealed was that a few officials thought that it would soon be time to slow the pace of their bond buying “somewhat,” but at the same time others counseled patience, which once again served to confuse investors even more.

The minutes revealed that almost all of the 12 members of the policy-making committee agreed that changing the current stimulus was not yet appropriate. Few clues were provided on the potential timing of the end of the QE3 quantitative easing programs but at the same time the minutes did little to dissuade people expecting a policy change next month. So basically the Fed accomplished nothing at this meeting when they said that “A few members emphasized the importance of being patient and evaluating additional information on the economy before deciding on any changes to the pace of asset purchases.”

They then spoke out of the other side of their mouths by adding that “At the same time, a few others pointed to the contingent plan that had been articulated on behalf of the committee the previous month, and suggested that it might soon be time to slow somewhat the pace of purchases as outlined in that plan.” After June’s policy meeting, Chairman Bernanke told a news conference that the central bank expected to start reducing its bond purchases later this year with an eye toward halting them altogether by mid-2014.

The Fed wants to see sustainable economic growth and improvement in the labor market before it winds down the bond buying, and they did note that the U.S. unemployment rate, which had stood at 7.4 percent last month, had declined “considerably” since the latest round of bond buying began last September. However, there were signs of “more modest” labor market improvement such as the large number of Americans who had given up the hunt for work. They want to keep rates near zero at least until the unemployment rate falls to 6.5 percent, provided that inflation remains under control. The minutes showed that several members were willing to consider lowering that threshold if they determined that an even easier policy stance was needed, but, on the other hand, some worried that changing the threshold could cause it to be viewed as a moveable goalpost, which could undermine its effectiveness.

Recent data could be used to support either side of the tapering argument as July existing home sales rose by the most since November 2009 with a gain of 6.5 percent while the four-week average of weekly jobless claims fell to its lowest level since November 2007. These figures show that the economy is indeed on a self-sustaining recovery and that tapering next month is feasible. But on the other hand, July new home sales declined by 13.4 percent, the worst drop in more than three years and July durable goods orders, those meant to last more than three years, fell by a large 7.4 percent from a 3.9 percent rise last month and this was the worst such showing in nearly a year. Non-defense capital goods orders, a closely watched proxy for business spending plans, declined by 3.3 percent, breaking four straight months of gains and were the largest decline since February. The decline in orders for both durable and capital goods suggest that manufacturing will probably not bounce back as quickly as many economists had expected after stalling out early in the year. These numbers would tend to make investors think that the economy is not strong enough to be left to its own devices and that the start of tapering should be pushed back to the December meeting. No wonder the stock market has basically done nothing lately!

In another unfortunate incident in a series of incidents that have served to undermine investor confidence in the markets, last Thursday the Nasdaq market found itself unable to distribute stock quotes and halted trading in all of its listed stocks for more than three hours. This fiasco follows the more serious and infamous “flash crash” on May 6, 2010 when the Dow Jones Industrial Average plummeted by more than 700 points in a matter of minutes and some stocks went to under $1 share before recovering most of the losses in an equally short period of time.

Then there was the disastrous first day of trading in the shares of FB on May 18, 2012 when the Nasdaq’s computers were overwhelmed and investors did not know what prices their orders had been filled at for hours or even days. This was followed by one of the largest market makers suffering significant losses when its computer system caused many incorrect trades to be submitted and as a result it had to be taken over by another firm.

These incidents are examples of how the decentralization of markets in various platforms and venues to 13 public exchanges have resulted in the need to offer the highest speed to their participants in terms of order execution, quickness and increased competition, which sometimes results in these unfortunate errors where the systems themselves get overwhelmed.

Donald Selkin is the Chief Market Strategist at National Securities in New York, a veteran in the securities industry for 36 years who is widely quoted in the financial media. 

This article appeared in print on page 39 of the August 28th, 2013 edition of Hamodia.