The markets, during the week prior to and following Labor Day continued the tight ranged, low volatility action which has existed for most of the summer. In fact, Friday’s decline of 2.45% was the first daily closing move of greater than 1% since July 8. That is 43 sessions without a 1% move in either direction on a closing basis. Let me tell you, it was a take no prisoner affair.
So what happened on Friday and does it really matter? To begin with, there was no material news on Friday that should have caused a 2.45% decline. Rather, there were a confluence of worries that hit the market. Specifically:
- Overnight futures coming into Friday were lower on news that North Korea fired off more test missiles. North Korea does this all the time. The concern one should have is how China is going to deal with North Korea. From the perspective of China’s Communist political state, it has very few other Communist nations over which it can exert influence. Currently, there are only a handful of Communist nations: China, Cuba, North Korea and Vietnam. North Korea is the standard bearer of totalitarianism. However, China relies on the rest of the world for economic reasons, so it has to delicately juggle between its economic and political interests. I do not think that North Korea is launching any live bombs in the future that we have to worry about. However, the market did worry about it.
- Boston Federal Reserve President Eric Rosengren said on Friday that he supports a gradual series of interest rate hikes. As a voting member of the FOMC, his comments sent more worries through the markets. Let’s understand that coming into 2016, the markets expected four interest rate hikes by the FOMC in 2016. I expected one or two. Time is running out for the FOMC as it has three meetings left this year, September 21, November 2 and December 14. Yet, the markets panicked, despite only 13% of economists expecting an FOMC rate hike in September, according to a Wall Street Journal survey and according to the Fed Fund Futures markets, there is only a 30% chance of a single rate hike in September, 35% chance in November and 60% chance in December. To top it all off, Fed Funds Futures barely nudged on Friday. We know deep down in our bones that the FOMC will raise rates once this year. What does it really matter if it is September of December (you can forget November because of the pending election)? Rosengren’s comments were like telling us that winter is coming soon and expect that it will bring snow. Today at 1:15 PM another Fed Head, Lael Brainard will be speaking in Chicago. She is considered an interest rate dove and any deviation from that stance could make a September rate hike more likely.
- The US Presidential Election outcome became more uncertain. Please understand that the markets and investors don’t really give a hoot as to who will win the election, Hillary Clinton or Donald Trump. Anybody who tells you differently is either uniformed, a liar or just personally biased. Since the August primaries, Clinton build a comfortable lead over Trump. That made a Clinton election more certain. The markets liked that certainty. However, in the past two weeks, especially last week, Trump began to catch up, making the election uncertain. Markets abhor uncertainty and that is what they woke up to on Friday. You see, money managers, will position themselves based on the assumption, not the hope that a certain candidate will win the Presidency. Once you have a high degree of certainty, then you can set up the portfolio accordingly. As uncertainty increases, that leaves portfolio managers wandering the financial dessert without a compass. As Hillary Clinton’s escalating medical problems become even more public and apparent than before, the election uncertainty will remain high.
- Interest rates backed up in Europe as perhaps, easy money policies in the Euro-zone may be coming to an end. To tell the truth all that happened was that some interest rates on the yield curve went from negative levels to positive levels, though most remain firmly negative.
- Finally, pundits on CNBC and other media outlets took all the above; and in financial terms, screamed fire in a crowded movie theater. Most have them have been wrong about the market rally all this year and need a market correction to justify their so far incorrect positions.
So, after several sleepy weeks for the market, bricks were laid in the proverbial “wall of worry” and the markets took a tumble. Since the last 1% market move on July 8, and after Friday’s 2.45% drubbing, the SPX is flat. Make no mistake about it, this is typical bull market action. Markets go up on an escalator and down in an elevator. The SPX is off 3% from its all-time high and 17.5% above its lows earlier this year. I will take the escalator action all the time if we go up 21% before slipping 3 % again in the long run.
Finally, here is a link to my Bloomberg Radio interview last Friday when we discussed Kroger (KR) and other supermarket stocks.
Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView AssetManagement, LLC was long KR — although positions can change at any time.
Scott Rothbort is the President & Founder of LakeView Asset Management, LLC, a registered investment advisor specializing in high net worth private wealth management. For more information on investing with LakeView Asset Management, LLC call us at 888-9LAKEVIEW or request more information by clicking on the contact button on the top right hand corner of the website. LakeView Management, LLC is a Nevada LLC, with its principal office located in Henderson, NV and branch office located in Millburn, NJ
Scott Rothbort is also the publisher of the LakeView Restaurant & Food Chain Report, a newsletter focusing in on food, restaurant, beverage and agricultural stocks. An individual subscription to the newsletter can be ordered at www.restaurantstox.com Furthermore; Scott is also a professor at the Seton Hall Stillman School of Business in South Orange, NJ.
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