GGFS Commentary

The perception of an increased potential for a September rate hike drove market participants to sell just about every asset class, causing major stock indexes to decline by 2 ½%, Oil falling by 3 ½% and bond yields to rise to the upper end of their recent trading range. This emotional (over) reaction to some Fed members indicating that a rate hike might be warranted shouldn’t come as a surprise as every Fed observer has long known that the Fed wants to raise rates and continues to look for data that supports their desire to raise rates. Unfortunately, the ‘data dependent’ Fed is unlikely to find sufficient positive economic figures that supports such a move. And while the absence of strong data doesn’t mean the Fed won’t move, it is a strong indication that at most they will likely raise rates only once before taking another extended break from monetary policy action. As such, investors should expect a further flattening of the yield curve when the Fed moves, an environment that shouldn’t hurt the outlook for equities in the long-term.

This Week’s Market Moving events:

• Monday: Chinese Economic data (10 PM EST)
• Tuesday: German Economic data, Small Business Optimism Index
• Wednesday: Mortgage Applications, Import / Export data
• Thursday: Retail Sales, PPI, Empire State Manufacturing Survey, Business Inventories, Industrial Production
• Friday: Consumer Prices and Consumer Sentiment

Stocks vacillated around the flat mark for most of the week, as market participants waited for Fed Chair Yellen to speak on Friday and provide further insights into when the Fed may resume its interest rate hikes. On Friday, Dr. Yellen took the stage at the annual Jackson Hole summit and in essence reiterated what had been said before – that while the case for a rate hike is strengthening, the Fed will remain data dependent and cautious in its approach. So, this week, investors will likely wait until Friday’s August employment report before making any portfolio decisions, of course then comes the three day Labor Day weekend which will be followed by some critical international data, including Japan and European Union GDP data. In other words, be prepared to hurry up and wait a bit longer, and in the meantime, a slow continued melt-up seems to be the most likely scenario.

This Week’s Market Moving Events:

Monday: Japanese Economic Data, Dallas Fed Manufacturing Data

Tuesday: Case Shiller Home Price Index, Consumer Sentiment, Investor Confidence data

Wednesday: Chicago PMI, Pending Home Sales

Thursday: Motor Vehicle Sales, ISM & PMI Manufacturing indexes

Friday: August Employment Data

This week, leading bankers and financiers will gather at the annual Jackson Hole economic summit, and the world will be watching and listening as central bankers, including Janet Yellen, will be providing briefings and updates on the discussions. While the event is highly anticipated, it is unlikely to offer anything new or insightful – you could say that the entire summit has lost focus and credibility over the past few years as it is almost assured that any monetary policy decisions will be dovish and predictable. Over the weekend Fed vice-chair Stanley Fisher indicated that a rate hike in 2016 is still in the cards and that the US economy is approaching full employment and the Fed’s 2% inflation target. That might be technically true, but the data certainly also points to continued underperformance and challenges in labor markets as well as risks of deflation. Translation, maybe another ¼ point in December for show, but no real change in policy for some time.

This Week’s Market Moving Events:

Monday: Chicago Fed National Activity Index

Tuesday: New Home Sales, Redbook Report, Richmond Fed Manufacturing Index

Wednesday: Home Prices and Existing Home Sales, PMI Manufacturing Index

Thursday: Durable Goods Orders, Kansas City Fed Manufacturing Index

Friday: Q2 GDP revisions, Corporate Profits, Consumer Sentiment, Janet Yellen speaks from Jackson Hole

As second quarter earnings season draws to an end, many market prognosticators are a bit perplexed. While earnings as a whole beat consensus estimates, they did so to a lesser degree than in previous quarters. Moreover, earning fell year-over-year by roughly 5% – in other words, corporations made less money for shareholders in Q2 2016 than they did in Q2 2015, yet major indexes hit new all-time highs this past week. The disconnect between fundamentals, i.e. earnings and earnings growth, and share prices should not be taken as a sign that fundamentals just don’t matter; they just don’t matter right now. Market participants are betting that low interest rates will be in place for many more years, and that simultaneously growth will reappear, providing fuel for the current rally.

Looking Ahead:

There isn’t much data for investors to digest this week, meaning that a slow drift higher is the most likely scenario for now. And while major indexes hit new all-time highs last week, not all stocks are over-valued, and smart investors continue to find opportunities.

This Week’s Market Moving Events:

Monday: Empire State Manufacturing Index, Housing Market Index

Tuesday: Consumer Prices, Housing Starts, Redbook Report, Industrial Production

Wednesday: FOMC Minutes are released, Atlanta Fed Business Inflation Expectations

Thursday: Philly Fed Business Outlook, Consumer Confidence Index

Next week – Jackson Hole

Market Recap:

The S&P and other major indexes closed at record highs last week as optimism over corporate earnings help lift share prices. Solid economic news in form of a solid housing starts report and a rise in oil rig counts, indicating strength in the energy sector, provided investors with the reason for the bullish sentiment. U.S. Treasury yields rose slightly for the week, while the USD gained against the Euro and other major currencies.

Looking Ahead:

It will be a busy week for market observers, with plenty of key economic data being released on Tuesday and Friday, including a first look at Q2 GDP, FOMC meeting minutes, and some of the most widely held companies releasing earnings. So far, about ¼ of the S&P constituents have reported quarterly earnings and of these 68% have exceeded expectations. However, this only tell part of the story, as the earnings bar is very low; the season is expected to bring a 3.7% decline in revenues and a 5.5% decline in earnings for the S&P. As such the forward P/E for the S&P 500 is now just above 17X, a historically high figure.

This Week’s Market Moving Events:

• Monday: Dallas Fed Manufacturing Survey. Gilead Sciences (GILD), Kimberly Clark (KMB) and Texas Instruments (TXN) report earnings
• Tuesday: Redbook Report, Case Shiller Home Prices, PMI Services, New Home Sales, Consumer Confidence, Richmond Fed Manufacturing Index, Investor Confidence. 3M (MMM), Apple (AAPL), Caterpillar (CAT), Elli Lilly (LLY), Dupont (DD) McDonalds (MCD), Verizon (VZ) report
• Wednesday: Durable Goods, Pending Home Sales, FOMC Announcement. Altria (MO), Boeing (BA), CocaCola Co (KO), Facebook (FB), Murphy Oil (MUR), Southern Co (SO) report
• Thursday: International Trade data, Kansas City Fed Manufacturing Index, Amazon (AMZN), Colgate Palmolive (CL), Conoco Phillips (COP), Ford (F), International Paper (IP), Raytheon (RTN) report
• Friday: Eurozone GDP, CPI and PPI data, U.S. employment cost index, Q2 GDP. Cabot Oil & Gas (COG), Merck (MRK), Xerox (XRX), Public Service Enterprise (PEG) report.