Trump Threatens While Central Banks Hedge
Are Central Banks Hedging Their Tightening Plans?
The stock market remained choppy for most of the week, as investors were leery of what the central bankers may or may not say at their conference at Jackson Hole, Wyoming, that began Thursday.
Janet Yellen spoke on Friday about “financial stability” and said any changes should be modest. Expectations were that she would speak on systemic risks, which is a key topic for banks should a recession be rearing its ugly head in the near future.
She didn’t go into much detail, outside of saying that the economy is stronger as a result of Fed policies and that there may be good reason for “modest” changes, like relaxing limits on banks’ equity trading.
I think the very topic is suggesting what is in the mind of Janet Yellen and in the head of the Fed, as we’ve seen four rate hikes since December 2015.
At this point, you can bank on another rate hike in December. Here, again, I think if Yellen thinks the Republicans can pass some sort of tax reform, the Fed will raise rates, but if the Fed believes the Republicans are going to fail at this, too, we may not see another rate hike this year.
What the market wants to know is what Yellen and Mario Draghi might say about the end of QE and their plans regarding tapering of their central bank balance sheets.
No one really expected any useful information out of this speech, and Yellen did not disappoint in that regard. The market was up slightly after her talk, but it was nothing more than what we’d see in normal intraday trading.
Trump Threatens Congress
Part of the stock market choppiness is a result of President Trump warning of a government shutdown if funding is not found to build the Mexico border wall as the U.S. debt ceiling looms.
Congress has 12 working days to resolve this when it returns from its summer recess on September 5th.
The president seemed to gain some traction for “tax reform” instead of “tax cuts” on Tuesday, and now he is pushing for funding to get the Mexico border wall built as an accomplishment for this fall.
I guess the stock market got discouraged thinking our senators aren’t willing to give him much of anything.
Still, somehow politicians can always figure out a way to borrow money, but their inability to pass pro-growth fiscal policies will soon come back to haunt them, as the risk of recession continues to loom ever more threatening.
Tight Real Estate Market
On Wednesday, we learned that new home sales tanked 9.4% for the month of July, dropping to the lowest number in seven months, raising concerns of a slowdown in the housing market.
New home sales for July were 571K verses 627K at this time in July 2016, adding to the worries that the economy is struggling.
While new home sales fell 9.4% in the month of July, it is commercial real estate that looks the most vulnerable, especially with so many mall closures.
Notice inflation-adjusted U.S. commercial real estate prices are back to where they were at the peak just before real estate burst in the 2007–2008 Great Recession. In truth, with so many retail shops closing, it is not hard to see why commercial real estate will soon be in trouble.
Market Strength Eroding
Meanwhile, the technical picture of the stock market continues to erode as we go into the last week of the month. I mentioned before we want to keep a close eye on the development of a couple of key factors.
The McClellan Summation Index is a breadth indicator and is simply a running total of the McClellan Oscillator values. As noted before, a bear market signal is generated if the McClellan Summation Index drops to -500.
As you can see, for the Nasdaq Composite, it is plunging fast! It wouldn’t surprise me to be near -500 by the end of next week, just as we head into the month of September.
The second technical concern is that the Russell 2000 index has broken below both its 50-day and 200-day moving averages. It could stage a rally and get back above it again, but it is now short-term overbought with the daily stochastics at 80%. That’s not good, suggesting another correction is likely soon, and it’s still below the 200-day moving average.
The 50-day moving average of the Russell 2000 is currently above the 200-day moving average, but it is quickly narrowing. A bear market sell signal is generated when the 50-day breaks through the 200-day, which is called a “death cross.” Technically, this is a poor development that is not far away now.
New lows continue to outpace new highs. I could go on, but the main point is institutional investors are getting ready as if they were preparing for a financial storm by becoming more and more defensive, and it is showing up now in the technical underpinnings of the stock market.
The S&P 500 index consistently failed to push above its 50-day moving average this week, as did the broader NYSE index (and now sits in short-term overbought conditions again).
Next week should be revealing.
To your wealth,