Stocks built on early gains on Friday enough to flirt with all-time highs, as the major indices finished at or near their highs of the day. Bulls are still hoping for a big, high-volume upside breakout, but Friday’s gains were enough to leave the bulls smiling as we headed into the weekend. A bit of backing and filling is actually a positive from a technical standpoint, so many bulls are patiently waiting as the major indices continue to hold on to the past few week’s gains and figure out which way to move from this high-level juncture.
On the docket for next week is the Federal Reserve meeting that takes place on Tuesday and Wednesday. Janet Yellen will not be holding a post-announcement press conference on Wednesday, so there will be a close look at what the Fed’s actual statement says on Wednesday afternoon. We all know that the Fed has said that it will remain “data driven,” and a lot of the data we have been seeing has been fairly positive. The June’s stellar jobs number, which released at the beginning of the month helped the stock market a lot, and the Fed will be weighing that positive news when it meets this coming week.
If the Fed decides not to raise interest rates, then the next chance for a rate hike would be in September. The problem with September is that the Fed is historically wary of doing anything “dangerous” ahead of a big Presidential election. Like it or not, Janet Yellen and the Fed know all too well what happened in the late summer and early autumn of 2008. That was when Lehman Brothers melted down and the stock market went into a free-fall. The TARP program was shuttled through Congress very quickly, and the Fed went into its “zero interest rate mode” that continues to this day.
The bailouts of the biggest banks kicked in back then, and Ben Bernanke and his Fed somehow avoided a repeat of the Great Depression. We all know that the 2008-09 crisis has been tagged as the “Great Recession,” and whatever the Bernanke-run Fed did back then likely allowed us to avoid a bigger crisis. The problem with that heroic effort to “avoid something worse,” was that it was designed to be a quick, emergency fix that would be “normalized” soon. Nearly eight years later, we have $12 trillion in various government bonds around the world at zero or less-than-zero rates if an investor wanted to buy them.
At the same time, our own Fed wants to “normalize” rates by raising them. You can only imagine what happens to a zero-rate bond when rates begin to rise. This is why our own Federal Reserve and central banks around the world have their hands tied. The reaction to a 25-basis point hike in December sent the S&P 500 down by about 10%, so you can see why the Fed might hold off on any chance of a rate hike next week or even when it meets in September. The Fed might want to raise rates, but it has to be thinking of the classic Clint Eastwood “Dirty Harry” movie, when Clint says, “so, do you feel lucky, punk?”
Critics of the Fed that include bond kings like Bill Gross and Jeff Gundlach have said that the zero interest rates around the world might be causing more harm than good, but central banks are hesitant to attempt or even try anything that could upset the global apple cart. After all, they are central bankers and not “bond kings.” We shall see how this interest rate drama plays out in the months (or years?) ahead, but the consensus right now is that the central bankers of the world will lay low and not rock any of the apple carts.
On the political front, the Republican convention is over, and after a week of intrigue and drama, Trump is the pick. We get a fresh new week of intrigue and drama next week at the Democrat’s convention in Philadelphia. There is never a dull moment in U.S. politics, but as we have said, investors do not seem all that worried. That is a plus for the bullish camp as we head toward November. The Gorilla wishes each and all a relaxing July weekend, and we will be back in action on Monday. Stay tuned as it will likely be a very interesting and challenging summer. Again, have a great weekend!
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