U.S. equity averages quietly closed out a harrowing week on Friday by finishing largely unchanged, thus setting the stage for another big showdown between the bulls and the bears heading into the critical Sept. 4 payroll report.
The outcome will determine, in large part, whether the Federal Reserve will raise interest rates in its Sept. 17 policy announcement, which would mark the first time the Fed has hiked rates since 2006.
That fear of policy tightening helped drive the volatility the market experienced this week, which rattled investors on a scale not seen since 2011.
In the end, the Dow Jones Industrial Average lost 0.1%, the S&P 500 Index gained a fraction, the Nasdaq Composite gained 0.3% and the Russell 2000 gained 0.8%.
Friday’s excitement was in crude oil, which rose 5.7% to close at $45.22 a barrel on reports that Saudi Arabia had sent ground troops into Yemen. That surge caps a whopping 16.3% two-day gain for crude, the best ramp since the bear market stabilization of early 2009. Overall, it was the best week for the black stuff since 2011’s “Arab Spring.”
Gold rose 0.8% to move back over its 50-day moving average despite a rebound in the dollar. That helped the collection of gold mining stocks in the Edge portfolio gain 3.3% as a group, with Kinross Gold Corporation (USA) (NYSE:KGC) adding 6.4%.
Overall, Edge subscribers are enjoying a 82% month-to-date gain thanks to defensive short bets against emerging market stocks and a leveraged long-play on volatility that were closed earlier in the week.
In corporate news, Big Lots, Inc. (NYSE:BIG) gained 15.7% thanks to a second-quarter earnings report that beat on higher same-store sales. Meanwhile, GameStop Corp. (NYSE:GME) lost 8% on weak Q3 guidance. At the sector level, energy stocks led the way with a 2% rise, while healthcare lagged, down 0.4%.
But all of this is secondary to what’s happening in the realm of central banking.
Monday’s dramatic intraday plunge — which took the Dow down more than 1,000 points — was driven by the fallout from a lack of new policy stimulus from the People’s Bank of China last weekend. That was quickly remedied on Tuesday with cuts to the PBOC’s policy rate and reserve requirement ratio.
U.S. stocks started their climb higher on Wednesday, after New York Federal Reserve President, William Dudley, said the case for a September rate hike was “less compelling” in light of recent market volatility — proving once again that the Fed is very sensitive to financial market conditions, and is willing to step in and conduct “verbal easing” as necessary to stem stock routs.
Back in October, St. Louis Fed President, James Bullard, teases the idea of extending the QE3 bond purchase program, which stopped the Ebola-themed decline.
On Friday, the start of the Jackson Hole economic symposium provided plenty of Fed-related headlines.
Vice Chairman Stanley Fischer said it was “too early to tell” regarding the potential for a September rate hike. Atlanta Fed President, Dennis P. Lockhart, said market turbulence makes him less resolute about a hike. While Cleveland Fed President, Loretta J. Mester, reiterated her feeling that the U.S. economy is ready for a hike.
Bullard noted the last 10 days should not change the Fed’s outlook “very much” given strong fundamentals. And the noted policy dove and Minneapolis Fed President Narayana Kocherlakota, said he didn’t believe near-term rate hikes were appropriate.
With the decision apparently on a knife’s edge (as futures market odds of a September rate hike move back over 50%), all eyes will be on the flow of economic data. On Friday, the July personal income and spending data came in largely as expected, with income up 0.4% to match the rate of the last three months. Durable goods spending rose 1.1%.
For next week’s jobs report, Deutsche Bank is looking for a lower-than-expected gain of 170,000 in payroll — well below the year-to-date average of 211,000 — as seasonal factors have resulted in soft August job reports in each of the last four years. Since 1988, August has disappointed forecasters in 21 of the last 27 years for a 78% miss rate.
Two caveats: They still expect the unemployment rate to fall to 5.2%, and they think the underlying health of the job market is good. But the atmospherics of the payroll miss would probably put the September rate hike on ice — clearing the way for stocks to continue their rebound.
If so, gold, oil and other commodities, should continue their recent rise on a bounce back in inflation expectations.
I wouldn’t jump back into stocks wholeheartedly, however, given the risk that the Fed surprises with a hawkish decision within the context of the S&P 500’s first death cross since 2011 — as the 50-day MA moved below the 200-day average, signalling failing medium-term momentum.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.
