As of Friday, we were in striking distance of a record high on the S&P 500 index. We have been here before, but something tells me that this time we just may break through. But for how long?
Granted, stock market volumes are exceptionally light, which is understandable, since we are heading in to one of the slowest weeks of the year. That makes any new highs suspect until volume improves. We would need to wait another week or so for that to occur. Next weekend is Labor Day and it is only after the holiday that the Big Boys get back into town.
What those players will do, once they are back in the cockpit, will determine the short-term direction of the market through September and into the end of October. There will not be a lot of upside catalysts to drive stocks higher during that period. But there are several issues that could pressure the downside.
Readers are already aware of the major risks: tariffs, higher interest rates, unpredictable tweets from the White House, etc. Some investors, as I mentioned last week, have already positioned themselves for an uptick in volatility by buying some of the more defensive sectors of the stock market.
We have also noticed that certain economic data points have failed to live up to the market’s high expectations. That does not mean that growth has slowed. It just means that we may be reaching a bit too high right now for the numbers.
Even the Federal Reserve Bank’s latest minutes reveal some concerns. Fed members are watching the developing tariff issue closely. Yet, they do not see any reason to stop hiking interest rates, but they are watching. Most central bank experts expect two more interest rate hikes this year (one next month and a second in December). Those expectations are already priced into the markets.
In an address to the annual Jackson Hole symposium of central bankers on Friday, Fed Chief Jerome Powell assured us that the economy is strong and that its performance will continue. Inflation is under control and he sees no signs of overheating.
Powell said that the Fed’s gradual interest rate tightening policies will continue. He ignored the recent comments by the president, who has complained recently over the Fed’s tightening policy, but Powell did say he was concerned by the government’s burgeoning deficit, the slow rate of wage gains, and the disappointing productivity among the nation’s corporations. The Fed can do nothing about any of the above, however. Those are issues that Congress and the president must address.
Markets rightfully interpreted his comments as “dovish,” at least on the margin. As such, readers should not expect a bear market anytime soon. At the worst, we could see more volatility over the next few weeks and months (both up and down). And while the earnings season is over for now (79% of companies “beat” profit estimates, while 72% beat revenues), analysts are already upping their forecast for profits and sales for next quarter.
As we head into the last days of the summer, I expect nothing negative to spoil your vacations. As for me, I want to advise readers that next week will be my last column until mid-September, when I return from a two-week vacation in Norway.