After the month of August ended with the worst performance by the S&P since May 2012, the oftentimes treacherous month of September has started out on the upside. In fact, counting last week’s holiday-shortened trading and the first day of this week, the S&P has now advanced for five straight sessions. And in the process, the Dow Jones Industrials were able to break the four-week losing streak that they had undergone last month.
On the surface, it does not appear that things have changed that much for the better to account for the positive start to the new month, which means that investors this year have basically used downside corrections as an opportunity to get into the market at lower levels. The most recent correction off the all-time highs achieved on August 2 until the final trading day last month on August 30 encompassed 4.5 percent. The largest correction so far for the year has been the 5.8 percent decline from what were then the all-time highs on May 21 until that downdraft ended on June 24. So in a sense, there is some symmetry to the pattern here, which of course is no guarantee that another larger correction is not in the offing.
What has caused stocks to go higher so far this month has been a combination of the old “bad news is good news” scenario, some economic reports that show that the economy is still showing signs of life on its own, and an easing of the worst-case Syrian scenarios.
The first of these three reasons was last Friday’s August non-farm payroll report, the final one before next week’s F.O.M.C. meeting at which the Federal Reserve will finally announce what sort of tapering they will undergo from their current $85 billion a month in purchases of Treasury securities and mortgage-backed securities. The report had to be considered a disappointment in the sense that only 169,000 jobs were added, below the 180,000 consensus and the unemployment rate fell to 7.3 percent, the lowest since December 2008. However, this decline was strictly a function of more people giving up looking for work. Their leaving the labor force says that they are no longer counted as unemployed. As a result, the proportion of Americans working or looking for work fell to its lowest level in 35 years as the labor force participation rate of 63.2 percent was the weakest since August 1978. In addition, both the June and July numbers were revised lower as well, to the tune of 74,000 jobs.
But this mediocre report was interpreted as friendly in the sense that if the labor market was not showing the type of improvement that the Fed would like to see, then this means that perhaps they will delay the start of the stimulus tapering to the December meeting or just reduce the current program by a smaller amount, such as $10 billion a month, and leave the mortgage-backed purchases untouched because mortgage rates have risen rather sharply since May, and this has resulted in a series of weaker housing reports.
The second reason for the better showing by stocks so far this month has been a number of economic releases that show things are holding up better than estimated, as for instance the August ISM Manufacturing Survey rose to its highest level since June 2011; the Fed Beige Book of economic conditions in various regions of the country showed that consumers are spending more on cars and housing and this has helped the economy to maintain a “modest to moderate” pace of expansion from early July through late August even as interest rates were rising. August domestic vehicle sales were at 15.8 million which was the best level since before the economic collapse five years ago; the four-week moving average of weekly jobless claims declined to its lowest level since December 2008 and the August ISM Non-Manufacturing Survey, which covers more than 80 percent of the economy, rose to its highest level in eight years.
Then there was all of the drama and hoopla over what should the U.S. response, if any, be to the use of chemical weapons by the Syrian government against its own people, which resulted in 1,400 deaths last month alone. This issue can disrupt financial markets because of the potential for higher oil prices if the conflict were to spread to other countries in the region such as Iran, as, if oil prices were to get out of control on the upside, this could result in slower worldwide economic growth. So far the pattern for the markets has been as follows: when the chances of a U.S. attack are greater (such as when Secretary of State Kerry first raised the issue two weeks ago), the market invariably declines; and when the chances of an attack are perceived to be lessened, the market tends to rally.
We have seen the latter dynamic at work as for instance when the British House of Commons rejected any military participation over the Labor Day weekend, the market began the first trading day of the month with a large upside move. The same thing happened late last week when President Obama’s plan was basically rejected at the G20 summit meeting held in Russia and when the United Nations Secretary General told the leaders that any military action must have the backing of the Security Council. This is basically an impossibility due to the certainty of a veto from permanent members Russia and China, which in addition to Iran are the largest suppliers of military equipment and anti-aircraft missiles to the Assad government.
Examples of the opposite dynamic, namely intraday market selloffs when the rhetoric gets ratcheted up, were last Friday when Russian President Putin stuck in his two cents by outlandishly saying that the chemical attack in Syria was a “provocation” and that his country was continuing its arms shipments .
Events taking place the rest of this week will also play into this scenario, as the president addressed the nation last night as part of his attempts to convince a skeptical Congress and reluctant public to support his air strikes. The Senate is scheduled to vote on a resolution by the end of the week and the House will debate the proposal next week, and the chances certainly look slim there.