U.S. stocks drifted lower on Monday amid light trading as everyone awaits the upcoming “hike/no hike” decision from the Federal Reserve on Thursday. Also weighing on sentiment were disappointing industrial production reports out of China and Japan overnight.
In the end, the Dow Jones Industrial Average lost 0.4%, the S&P 500 lost 0.4%, the Nasdaq Composite lost 0.3%, and the Russell 2000 lost 0.4%.
The big traders were on the sidelines: According to Nanex data, S&P 500 futures set a new record low average trade size today. And fewer than 800 million shares traded hands on the NYSE floor vs. a 20-day average of 984 million.
Overall, nine sector groups logged losses, led by energy (down 0.8%) and materials (down 1.3%) while utilities squeezed out a gain of 0.3%. Treasury bonds climbed slightly to push the 10-year yield down to 2.17%. Crude oil lost 1.7% to close at $44.00 per barrel while copper dropped 1.7%.
Gold bucked the trend in commodities to rise 0.4%. Mining stocks caught a bid in response, with Franco-Nevada Gold (FNV) up 0.8% for Edge subscribers to take its total gain to 2.7% since recommended in August.
Apple (AAPL) gained 1% — jumping back to mid-August levels — after reporting that pre-orders for its new iPhone 6s and 6s Plus were strong and on pace to exceed last year’s first weekend iPhone pre-orders of 10 million units. The company added that online demand is exceptionally strong and beat their internal forecast.
It’s worth noting that Chinese sales are being lumped into opening weekend pre-order data for the first time, which is likely skewing the result.
Time will tell whether the very odd letter allegedly from AAPL CEO Tim Cook to CNBC host Jim Cramer talking up Chinese sales will be borne out in the hard, audited Q3 quarterly earnings data.
Outside of AAPL, most of the remaining big-cap tech stocks logged losses.
Looking ahead, Tuesday will deliver the August retail sales (the consensus forecast is for a 0.3% gain) and the August Industrial Production (consensus -0.2%) reports.
But all of this pales in comparison to the monster decision the Federal Reserve must make as it concludes its latest two-day policy meeting on Thursday. For now, the futures market continues to believe that the near-0% interest rate policy will be maintained given market turmoil in August and vulnerabilities in China and elsewhere.
Current pricing puts the odds of a September rate hike at less than 30%. Yet, by a slim margin, a group of economists polled by Reuters believes the first rate hike since 2006 will happen this week.
Comments by Fed officials before their pre-announcement media blackout period did little to clarify matters, with New York Fed President William Dudley saying a September hike had become “less compelling” despite Fed Chairman Janet Yellen touting (as recently as July) the benefits of hiking sooner rather than later, since it would allow a more gradual pace of subsequent rate hikes.
For now, Bank of America Merrill Lynch economist Michael Hanson believes a September rate hike is the most likely outcome — albeit, a very close call — because of the undeniable cumulative improvement in to the economy and job market. There is also the risk that if the Fed delayed, it would be clear to all that it was beholden to the markets and could result in a dangerous loss of credibility as a “data-dependent” institution that will, if needed, lean against speculative excess.
Given the Fed’s track record of catering to markets during this bull market, with the chart above (from Citigroup) showing how dependent market gains have been on the Fed’s bond buying stimulus, I would be surprised if it passed on this opportunity to once again bolster the bulls by punting its rate hike decision to October.
There are other issues in play as well, from the nearly $8 trillion in dollar-denominated debt in emerging markets (that would be at risk of a dollar rally fueled by a Fed hike) to the growing opinion that central bankers have already lost credibility.
My advice to traders: In this environment, it’s best to stay neutral and wait out the storm.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. Free two- and four-week trial offers have been extended to InvestorPlace readers.
