U.S. equities hugged the unchanged line on Wednesday, continuing a three-month quiet period in volatility.
In the end, the Dow Jones Industrial Average lost 0.1%, the S&P 500 Index fell a fraction, the Nasdaq Composite gained 0.2% and the Russell 2000 finished the day 0.6% higher. Treasury bonds were little changed, the dollar was stronger, gold lost 0.4% and oil finished higher in choppy trading adding 1.5%.
Energy stocks led the way with a 0.3% gain, boosting the Sept $42 ConocoPhillips (NYSE:COP) calls recommended to Edge Pro subscribers on Tuesday to a 32% gain.
Consumer staples were the laggards, down 0.9%. Apple Inc. (NASDAQ:AAPL) rebounded from mid-day weakness to gain 0.6% after announcing the iPhone 7 (no headphone jack, water resistant, and better camera) and a new Apple Watch (faster with GPS). Concerns about smartphone saturation and innovation slowdown are likely to linger, however.
In fact, the last 40 days has marked the tightest trading range for large caps in at least 100 years. Just let that sink in for a minute, especially with major event risks coming up including the Federal Reserve’s rate hike decisions, the Italian constitutional referendum in October, and the U.S. presidential election in November.
But under the surface, there was excitement if you know where to look. Transports got a lift thanks to airlines, which benefited from a number of positive announcements.
Speaking at the Cowen Global Transportation Conference, Delta Air Lines, Inc. (NYSE:DAL) CEO Jacobson said his airline’s profitability was “trending towards flat” despite near-term challenges — a lingering concern for the industry latterly — lifting shares 5.7%. Southwest Airlines Co (NYSE:LUV) gained 4.7% after estimating a capacity gain of less than 4% next year vs. estimates of 5-6%, easing worries about oversupply and margin pressure.
American Airlines Group Inc (NASDAQ:AAL) gained 4.8%, pushing the Sept $37 calls recommended to Edge Pro subscribers on August 18 to a gain of more than 100%.
I expect overall market volatility to increase as September and October are seasonality weak months for stocks. Upside is the most likely scenario as the Fed continues, for some reason, to thunder on about the risks of a September rate hike despite all the evidence suggesting otherwise.
The August jobs report disappointed, factory orders are weak, there was an outright contraction in manufacturing activity (first since February), and we’re seeing a continued decline in construction spending.
The non-manufacturing ISM, which measures growth in the larger services sector of the economy, suffered its largest month-over-month slowdown since 2008 and fell to its weakest level since early 2010.
Today, San Francisco Fed president Williams reiterated his view that the economy is solid and it would be better to quickly get back to a pace of gradual rate hikes. Richmond Fed president Lacker told reporters that the case for a September rate hike is solid and that officials need to make up ground on rate hikes.
He dismissed recent weak economic data as not changing his outlook for the year. And Kansas City Fed president George said she believes the U.S. labor market is at or near full strength.
Still, the futures market only assigns a 18% chance to a September hike. Confirmation of a “no hike” decision would likely lift stocks into Election Day.
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.
