After putting in its best weekly performance in a month last week, the market started the new week on Monday with its second consecutive daily decline. This does not take away from the fact that despite this back and forth trading, which has resulted in the S&P showing a gain for 2014 so far, of one-half of one percent, the market has shown tremendous resiliency in light of many challenges that have been thrown in its path this year.
The latest one came last Wednesday, when new Fed Chair Janet Yellen held her first press conference after the release of the statement accompanying the latest F.O.M.C. meeting. In this statement, they raised guidance for the federal funds rate to one percent by the end of 2015 and 2.25 percent at the end of 2016 and this compares to the previous .75 percent and 1.75 percent respectively. The current rate is 0–.25 percent. They repeated that the funds rate will remain near zero for a “considerable time” after its bond-buying stimulus program ends. But what sent the market into a tizzy was Mrs. Yellen’s comment in answer to a question about clarifying the time frame in which rates might start to rise. She said that “probably means something on the order of around six months.”
What made this comment so shocking to investors was the fact that she has long been considered in the dovish camp and the overwhelming consensus was that the Fed would not begin to raise rates until the end of next year. But this comment implied that they might pull the trigger six months after the end of the tapering process, which is scheduled to end this coming fall. It will end at this time because the original $85 billion a month in stimulative bond purchases is being reduced at a rate of $10 billion a month and is currently down to $55 billion a month. This means that at the current rate of reduction, the bond buying should come to an end around October. Six months after that means the spring of 2015 could see the first increase in the federal funds rate since it was pushed to its current record low levels in December 2008 at the depths of the financial meltdown.
The committee also dropped the linkage between the federal funds rate and a specific level of unemployment, as they had done for so long now, namely 6.5 percent. They now said that their assessment will take into account a “wide range of information” including labor market conditions, inflation expectations and financial markets. The challenge for the Fed is that they want to keep market expectations aligned with their own forecasts because if investors start to price in earlier rate hikes, the result would be tighter financial conditions that could deter the very investment and hiring that the Fed wants to encourage.
In addition to the question of when interest rates will start to rise, the market also has to deal with the ongoing situation in the Ukraine and Crimea and the U.S. reaction to it. Late last week, President Obama raised the stakes by targeting some of Russian President Putin’s closest long-time political and business allies with personal sanctions. The extension of visa bans and asset freezes reached deep into Putin’s inner circle as Moscow completed the annexation of Crimea back under Russian control.
The 20 names added to the U.S. blacklist included Kremlin banker Yuri Kovalchuk and his Bank Rossiya, major oil and commodities trader Gennady Timchenko and the brothers Arkady and Boris Rotenberg, who are linked to large contracts on gas pipelines and at the Sochi Olympics, as well as Putin’s chief of staff and his deputy, the head of military intelligence and a railways chief. The U.S. Treasury said that Mr. Putin has investments in Timchenko’s Gunvor commodity trading company, which they naturally denied by saying that Putin had no ownership in this company and “any understanding otherwise is fundamentally misinformed and outrageous,” and whom do most investors believe?
Mr. Obama also signed an executive order that clears the way for U.S. sanctions against broad sections of the Russian economy should Putin make military moves beyond Crimea and into southern and eastern Ukraine which also have large Russian-speaking populations. This means that Bank Rossiya, with its $10 billion in assets, would be frozen out of the dollar. The E.U. has been much more cautious because of their economic ties with Russia, especially in regard to their import of oil and natural gas.
Economic reports in this country continue to show an economy that is trying to shake off the negative effects of the miserable weather conditions that affected so many parts of the nation. For instance, February building permits, a measure of future activity, rose by the most since last October, the March Philadelphia Fed Manufacturing Index increased by more than expected and the February Index of Leading Economic Indicators also gained by more than had been predicted. These reports were partly responsible for last week’s strong market showing, despite the headwinds from the Fed and Ukraine.
The S&P completed what is a “triple-top” resistance level, which means a price area where it has failed on three separate intraday occasions and which it needs to break through in order to continue the overall market advance. For instance, it reached 1883.57 on March 7, 1882.35 on March 11 and 1883.97 last Friday, which was its highest price ever. But on all three occasions it could not maintain these heights by the end of the day. In fact, the 1878.04 close on March 7 is still the official all-time high. So one can certainly make the argument that it needs to make a clean breakthrough above what is now going to be a strong prior area of selling in order to allow it to achieve the next leg higher. Whether or not it has the strength to attain new highs is something that investors have to keep their eyes on, especially in light of the formidable current challenges.
It would now appear that the best chance for the market to break out to new highs above the aforementioned resistance area would be during the first-quarter earnings reporting season next month, whose lowered expectations for gains of between only one and two percent might make it easier for stocks to finally overcome this obstacle.
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.
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