We are in October, and we all know that October can be a tough month for the stock market. The Lehman-led meltdown from eight years ago remains on investors’ minds, and the recent problems at Deutsche Bank (DB) had many investors thinking that we were in another crisis that could rival the calamity of 2008-09. Central banks have become astute at avoiding such problems, so the first week of October ended with stocks slightly lower on Friday. For the week, the Dow and the Nasdaq were down 0.4%, while the S&P 500 posted a weekly loss of 0.7%.
The big news of the week was the government’s jobs report on Friday, and it came in fairly weak with 156,000 new jobs having been created. Economists were expecting 172,000 new jobs in September versus the 167,000 we saw in August, so what we saw on Friday was disappointing, to say the least. It was a rough number in that it was not all that bad of a number, but then again, it was not all that great. It showed that the economy is holding its ground, but it also shows an economy that is not expanding at all and merely staying in a lackluster place.
Earnings season begins on Monday with Alcoa (AA), and this third-quarter earnings season will be very telling. The buzz was that the third quarter of 2016 might be picking up steam, but the September jobs report suggests differently. We did see second-quarter GDP upgraded to 1.4% from 1.1% last week, but it will be interesting to see if third-quarter earnings can signal that the broader economy is improving or contracting. Earnings have been waning in recent quarters, and while estimates have been lowered, there is no getting around the fact that we are in an earnings recession.
This puts the recently hawkish Federal Reserve in a tough position if it wants to raise interest rates. With a booming and improving economy, a rate hike in December of a quarter point would be a piece of cake. The Fed’s goal of “normalizing” interest rates back to more “normal” levels would go unnoticed. The “data driven” Fed is not getting the data it needs, though, and with Friday’s weak jobs number, the Fed might have its hands tied for the December rate hike that it has telegraphed so clearly over the past couple of months.
Janet Yellen has her work cut out for her if she wants to push a December rate hike before the end of the year. Recall that the zero or near-zero interest rate environment was put in place to save us from the 2008-09 meltdown, and that policy was supposed to be temporary. It sort of worked. Eight years later, though, we have a Fed and central banks around the globe keeping rates near zero and buying loads of bonds of which some have negative yields. What happens to these bonds when rates eventually head higher?
Bill Gross recently said that there are about $15 trillion in bonds with negative yields around the globe, and many are on central bank balance sheets. In the old days, all of this QE, money printing and zero interest rates could or should have caused inflation, but it did not cause old-fashioned inflation. We are in a new realm right now, so we will wait and see how it ultimately plays out. If all of these central bankers were geniuses, we would be tipping our hats to them if the broader global economy were strong, but it is still teetering at best. The 1.4% GDP rate in the U.S. immediately comes to mind.
But the stock market is still holding tight near all-time highs, and that is a plus. We have the Presidential election just a few weeks away, and that will be one “wild card” off the table, which should allow financial markets to get back into a more natural mode. The Fed can be the Fed, and we will likely see it do what it really has in mind for interest rates. That said, the Gorilla wishes each and all a relaxing weekend. We will be back in action on Monday, so again, have a wonderful autumn weekend. This will likely be a challenging month for the financial markets, so enjoy the temporary calm.
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