State of the Stock Market Analysis for the Week Ending October 16, 2016 (To Raise Or Not To Raise? 10-16-16) All You Need Is Jobs

Several of the big banks topped lower earnings estimates Friday morning, which allowed investors to breathe a big sigh of relief. We did see a late-day selloff on Friday, however, and the major indices closed out the week with just slight losses. For the week, the Dow was down 0.6%, the Nasdaq was down 1.5% and the S&P 500 was about 1% lower. Some technicians noted that all three of the major indices finished the week below their respective 50-day moving averages of 18,256 for the Dow, 5,220 for the Nasdaq and 2,153 for the S&P 500. A dip below the 50-day moving averages is normal in any bull market, but the challenge now is for the majors to get back above those levels as quickly as possible.

Janet Yellen gave a speech in Boston on Friday where she said the Fed might need to create a “high-pressure economy” to reverse the weaknesses we have seen from the NIRP and ZIRP policies of the post-Lehman, post-housing bubble popping that occurred eight years ago. The jury is still out on that speech at the Boston Fed, but it implied that the Fed might be wanting inflation to move back toward 3% instead of the Fed’s “planned” 2% goal, and Yellen’s comments sent yields on longer-term bonds higher. The yield on the 10-year U.S. Treasury rose sharply, and those yields are now near 1.8% versus the 1.55% that we saw at the end of September. Is this yet another sign of Fed plans for an interest rate hike in December? Who knows, but when the Fed Heads hint at higher inflation, it tends to make the stock market a bit nervous.

So Janet Yellen’s comments that the Fed is frustrated and may be ready, willing and able to let inflation pick up in the next year or so is worrisome for the stock market. A little inflation might actually be good for a moribund 1.4% GDP economy, but the Fed has to be careful what it might wish for. Inflation has historically been able to take on a life of its own, so that was why it was so interesting to hear the Fed Heads use the term “high-pressure economy.” The Fed has promised for years to remain “data driven” on interest rate hikes, but the data, from GDP to consumer confidence, from jobs growth to earnings is simply not giving a “green light” to raising short-term interest rates back to “normal” levels.

Inflation is a strange bird. The U.S. government has become very astute at having the CPI or the PPI reports show 0.1% or 0.2% monthly increases for years! Somehow health care costs, college costs, and food costs that we all know are there seem to never show up in the “official” government reports. This is what makes Yellen’s comments in Boston on Friday worth taking note of in a big way. How do you create a “high-pressure economy,” whatever that might mean? The Fed will say little and do nothing big ahead of the Presidential election, so the bigger wild card is what the Fed says and does at its mid-December meeting. Markets do not like “unknowns,” and we are getting more than a few right now.

Earnings season is in full swing, and we get A LOT of big names next week, especially from many of the big U.S. multinationals. This upcoming week should set a tone for how October unfolds, and the only problem is that so many expectations have been dramatically lowered. We are apparently in a six-quarter earnings recession, but when news breaks that big companies like Microsoft (MSFT) or McDonalds (MCD) have topped estimates, all seems calm in the Land of Oz. The strength in the U.S. dollar comes into play for the multinationals, so we will keep a close and cynical eye on an earnings season over the next two weeks that should give us some clear insight on both the U.S. and global economies.

On a much, much, much lighter note, Halloween is on the way, and the Gorilla is still trying to figure out a costume for Halloween. Hillary and Trump masks are definitely out of the question! (Neutral, non-partisan comment: both are too scary.) We live in serious times, but the Gorilla is still open to any costume suggestions for him as to what he should wear as he passes out candy to trick-or-treaters this year from his Treehouse. The global “creepy clown” craze and theme is definitely out of the question too, so any fun ideas or suggestions are welcomed from subscribers in these “spooky” times. The Gorilla read that Dow component McDonalds (MCD) is keeping Ronald McDonald in a low-key mode lately in terms of marketing because of “clown fears.” What a world we live in these days!

That said, the Gorilla wishes each and all a relaxing October weekend. It is a beautiful time of year, football is in full swing, and it is time to rake leaves! Or mow the lawn one more time before the snow hits if you are in those sorts of weather or geographical regions. Bulls are sensing a post-election rally into the end of the year, so stay tuned. The Thanksgiving Rally, the Santa Claus Rally, and the New Year’s Rally seem to show up when we least expect them to, so stay tuned. The end of the year will likely be brighter than what we are seeing right now. Have a great weekend, and we will be back in action on Monday!


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