For all of the weeks and weeks of analysis, commentary and discussion about what the Fed would do this past week with regard to interest rates, you would have thought we would have had some sort of big, blockbuster move in the stock market either up or down. We heard every viewpoint from every financial talking head and strategist, and it shaped up to be one of the most talked about Fed meetings in a long, long time. The Fed held rates where they were, and the market yawned on Thursday and finished essentially flat. We then saw Friday’s big decline, which was enough to leave stocks mixed and flat for the week, with the Dow down 0.3%, the Nasdaq up 0.1%, and the S&P 500 down 0.2%.
Bulls had been hoping for a strong finish to the week, but all we got was a big, down Friday that saw the Dow drop 1.6%, the Nasdaq fall 1.4% and the S&P 500 dip by 1.7%. The catalyst for Friday’s decline appears to have been that Fed decision itself, as well as the comments from Planet Janet. The buzz was that by leaving rates flat, Janet Yellen and the Fed were obviously worried about something, and that something according to Yellen, were concerns about a slowing global economy and the lack of any inflation. Yellen mentioned economic slowdowns in both Europe and Asia, and she mentioned China as a main point of concern.
China, as we recall, spooked global markets recently with its 3% devaluation of the yuan, and many China watchers said that the devaluation was an attempt to hedge against any sort of rate hike from the Fed. That devaluation also roiled world financial markets, as well as the U.S. stock market that saw the S&P 500 drop nearly 10% in August. It appears that the Federal Reserve got the message in August, which is likely why it decided to keep rates unchanged this week. The old “global slowdown” theme is back in vogue, and the 4% decline in the price of oil on Friday alone reinforced those global GDP fears.
Oil had been on an upswing this summer, and the thought was that rising oil prices reflected a strengthening global economy. Crude was getting close to $48 per barrel as late as Thursday, but it closed out Friday a few cents below $45 per barrel. We will see if this new “global slowdown” theme continues to weigh on oil prices next week, but there is no getting around the fact that falling oil prices and the Fed refusing to raise rates suggests something could be amiss in the global economy. Maybe the Fed is just afraid to raise rates so as not to rock the apple cart in China. The last thing the Fed would want to see would be another devaluation (even a small one) by the Chinese.
Some Fed critics questioned whether this is something the Fed should be worried about, since the Fed’s mandate is to maximize employment and contain inflation. These critics question why the Fed should worry about China, especially if it is at the expense of doing what is best for the U.S. economy. Yes, China is important as the second largest economy in the world, but the Fed did have a chance to raise rates a quarter point and move toward the “normalization” of interest rates. It seemed that if the Fed was going to raise rates, this past Thursday would have been a safe and painless way to begin, but that was not to be the case.
This could explain Friday’s free fall, as investors suddenly had a new worry to replace the worry about “what the Fed would do.” Instead of worrying about “will it or won’t it” raise rates, the new worry is whether the global economy might be hitting some potholes of economic weakness. China, in particular, is the major concern since its economy is so large that if China sneezes, the rest of the world could catch a cold. The Chinese stock market has bounced back a bit from its 40% summer decline, but China is still acting a little shaky in terms of its economy, and that is always cause for concern.
From a technical standpoint, the S&P 500 seemed on its way to recapturing the 2,000 level as it closed Thursday at 1,990. Bulls had hoped that the S&P 500 might even get back above its 50-day moving average of 2,017 sometime soon, but with Friday’s swoon, that feat might take some extra work. The S&P 500’s 200-day moving average is 2,043, so it is still in that infamous “Death Cross” pattern with the 50-day moving average below its 200-day moving average. Maybe we will get a bounce next week that will pump some positive energy back into the stock market, but on Friday, the broader market simply just ran out of steam.
The global GDP question will likely be the big theme next week, so we shall see what happens. Bulls never like to see a big, down Friday finish with the stock market near its lows of the day, but that was what we saw. At least the major indices were flat for the week. That said, the Gorilla wishes each and all a restful, final weekend of summer. It has been a very challenging summer that actually felt a whole lot more like fall, so enjoy a quiet weekend of friends, family, fun and some football. Fall could be just as challenging. Again, have a great weekend!
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