The Fed…And An Omen

Are markets responding positively to the wrong indicators?

An eye on the markets, from LMK Wealth Management

 

Markets ended the shortened trading week down, battered by selling pressure and volatility around possible Fed actions. For the week, the S&P 500 lost 1.14%, the Dow slid 1.23%, and the Nasdaq trimmed 0.09%.

Oddly enough, markets rose earlier in the week on a couple of lukewarm economic reports, which raised expectations that the Fed will be forced to continue to bolster the economy with its quantitative easing program. The last weekly jobless report for the month showed an increase in unemployment claims, meaning job growth looks to have been essentially flat over the last two months. We also got another look at revised first quarter GDP, which came in at 2.4 percent, down from the 2.5 percent initial reading. The downward revision was expected due to some slower inventory growth.

A disconnect between the economy and equity markets

While poor economic reports typically result in market declines, the short rally is a perfect example of the disconnection that can occur between the economy and equity markets. Currently, investors seem to be more worried about the end of the Fed’s easy money than the economy, so they may react positively to economic data that suggests the Fed will continue its stimulus activities. On the flip side, markets may respond nervously to positive economic data due to the fear that economic improvement will cause the Fed to pull the plug. For this reason, we may see additional volatility and contradictory market behavior in the coming weeks and months as the Fed starts to taper its bond-buying activities.

On the flip side, markets may respond nervously to positive economic data due to the fear that economic improvement will cause the Fed to pull the plug. For this reason, we may see additional volatility and contradictory market behavior in the coming weeks and months as the Fed starts to taper its bond-buying activities

On the positive side, ‘sell in May’ got trampled, despite some volatility, as markets ended up for the month. Additionally, consumer sentiment for May beat expectations, reaching the highest level since July 2007,[4] showing that consumers are still optimistic about the economy.

On a side note, you may have seen several headlines referencing the ‘Hindenburg Omen,’ a signal triggered when multiple stocks set new 52-week highs and lows simultaneously, essentially reflecting extreme volatility.[5] When you hear about these types of signals, we urge you to take them with a grain of salt. There is no single technical indicator that can predict with 100% accuracy which direction the stock market will move. While they can be useful at times, we believe technical indicators need to be evaluated in the light of many other factors such as longer-term trends and an investor’s overall objective and tolerance for risk. As always, we will continue working to ensure our clients receive sound investment guidance that is in line with their long-term goals, regardless of what any short-term ‘omens’ may suggest.
 
ECONOMIC CALENDAR:

  • Monday: PMI Manufacturing Index, ISM Mfg. Index, Construction Spending
  • Tuesday: Motor Vehicle Sales, International Trade
  • Wednesday: ADP Employment Report, Productivity and Costs, Factory Orders, ISM Non-Mfg. Index, EIA Petroleum Status Report, Beige Book
  • Thursday: Jobless Claims
  • Friday: Employment Situation