It was a rough week for investors, and Friday’s lower close was disappointing for the bullish camp that was hoping for a rally to wrap up trading for the month of May. Weekly declines were modest, though, as we saw the Dow down 1.2%, the Nasdaq 0.4% lower and the S&P 500 off by 0.9%. Economic news drove the weakness, as did ongoing worry that the Federal Reserve might raise interest rates sooner rather than later. It was not that bad of a week for investors, and the fact that losses were minimal was a big positive as we head toward June.
The big negative was the GDP number for the first quarter. It fell by 0.7%, and while that was not as bad as the 1.0% that economists had predicted, it was still lower than the previous 0.2% rise we had recently seen. The University of Michigan Consumer Confidence report for May was also disappointing, as it fell to 90.7, from April’s 95.9. Economists were looking for a revised 89.5 reading, so while confidence topped that estimate, it was still a weak-looking number that helped weigh on the stock market on Friday.
These sort of numbers put a lot of pressure on Janet Yellen and the Federal Reserve. The Fed keeps saying that it wants to raise rates, but if it remains “data driven,” the data is just not there. A slowing economy, falling consumer confidence and a stock market in a “holding pattern” is not the type of scenario where interest rate hikes would play all that well. Interest rates have been near zero for more than six years, and seeing a weakening economy this far along is worrisome to most investors.
The Dow closed on Friday at 18,011, which puts it below its 50-day moving average of 18,043. The Nasdaq and the S&P 500 are still holding above their 50-day moving averages of 4,995 and 2,101, respectively, but those levels are close. Bulls are looking for support and a bounce next week from these important levels, but seeing this past week’s downtrend is causing a lot of concern. The negative GDP number we saw on Friday hints that the economy might actually be heading toward a recession, which is keeping a lid on the six-plus-year-old bull market.
What makes things complicated for the Fed right now is the fact that interest rates are at zero. Were we to have a stock market meltdown or continued ugly-looking GDP numbers, the Fed is unable to “ride to the rescue” and cut interest rates as it has done in the past. There have been many critics speaking strongly of late that the Fed is behind the curve, and that the Fed should have raised rates earlier than now. Again, this puts the Fed in a very tough spot because the last thing the stock and bond markets want to see right now is higher interest rates.
Alan Greenspan recently warned of a market “tantrum” once rates begin to rise, and the latest financial press is echoing the same concerns. The near-zero interest rates have been in place so long, that many traders and investors have forgotten how markets can react to rising rates. It was one thing to bailout the banks and the economy after the Lehman collapse in 2008, but it is another thing to have kept interest rates at zero for more than six years. As some market sages say, “It works until it doesn’t.”
The narrow trading range we have seen all year suggests that some sort of breakout in either direction is coming soon. This week’s downturn was disappointing for the bulls, so maybe a June bounce is on the horizon. We shall see. The Federal Reserve is in the driver’s seat now, and it will hopefully work its magic. It worked before, and it will likely work again, but negative GDP and falling consumer confidence make for a challenging picture as we head toward summer.
The Gorilla wishes each and all a relaxing final weekend of May. Watch for the Fed Heads to roll out next week and assure us all that everything will work out fine. June will be interesting to say the least, so remain ready for anything. We will be back in action on Monday, so again, have a great weekend!
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