State of the Stock Market Analysis for the Week Ending September 4th, 2016 (Declining Job Numbers Leads to Possibility of Rate Hike 9-4-16) All You Need Is Jobs

It was one of those weeks in which we thought we would get some clarity, but clarity never showed up. The government jobs report showed 151,000 new jobs for August, which was below the 180,000 that economists had expected, and it was way down from July’s 255,000. This is not exactly the bullish report that many Fed hawks were looking for, and it will likely push out a rate hike until December. Various Fed Heads were still saying on Friday that it was a strong enough employment report to merit a rate hike on September 21st, but we will just have to wait and see.

The broader market took the employment report and closed out the week with all three of the major indices posting weekly gains of about 0.4%. It was an up-and-down week just the same, though, and like last Friday’s Janet Yellen speech, investors THOUGHT we would have some clarity, but clarity continues to be elusive. Unemployment levels remained unchanged at 4.9%, which was counter to the decline of 4.8% that economists had expected. There again is more mixed news that is neither that great nor that bad.

It is Labor Day weekend, though, and this means that the bigger market players will be back in action on Tuesday. The big question is how the “generals” interpret the Fed’s recent hawkishness AND the fairly weak jobs report, as well as the 1.1% GDP growth rate we recently saw. It’s difficult to make a case for a rate hike with weakening economic numbers, but then again, maybe the critics of the Federal Reserve are right. Maybe these zero and less-than-zero interest rate policies are no longer working, as was communicated by bond giant Bill Gross this week.

Zero interest rates are pressuring smaller banks, insurance companies, and old fashioned savers beyond belief, so maybe the time really is right to stay the course and “normalize” rates upward. The winners during the ZIRP time have been stock markets, bond markets and, oddly enough, even home prices and real estate. Academics, economists, and strategists are at a loss to explain what zero or even negative rates eventually have on the global economy, and it is this “unknown” that has the Fed wanting to get rates back up to a more “normal” level.

The challenge for the central banks of the world is to raise rates without creating a NEW financial crisis if rates do indeed rise (or get raised). The zero-rate policies got financial markets out of the 2008-09 meltdown, but those rate cuts were SUPPOSED to be a short-term fix. Markets grew accustomed to the low rates, and now, seven or eight years later, the thought of central banks or our own Fed actually RAISING rates makes stock and bond markets feel like sheep hearing wolves howling in the distance. It’s certainly a tough time to be a central banker, even if you do get to have fun up in Jackson Hole, Wyoming for a few days.

The Fed was hoping that strong jobs growth would be the “golden ticket” to a September rate hike, but Friday’s number was just not that great. Economic news continues to come in good, but not all that great, so if you are the Fed, what do you do? You have a stock market hovering near all-time highs, and do you rock the boat with a September rate hike? Say the Fed raises by a quarter point and then the stock market drops 10% or 20%. Then the Fed has a bigger problem on its hands as we head toward a “wild card” election in the U.S. in November.

This likely scenario seems to all but guarantee no action from the Fed in September, but who knows? We did have an up week for stocks, and the Fed Heads are probably breathing a sigh of relief. We also have college and pro football kicking off, so that should provide some calm, cool and fun relief from worrying about Janet Yellen and the central banks of the world. That said, the Gorilla wishes each and all a relaxing Labor Day Weekend. We will be back in action on Tuesday, so have a great weekend whatever you may have planned!

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