It was a roller-coaster sort of week, and Friday’s fade and weak close was a big disappointment. To quote the 1970s movie with John Travolta, Greece is still “the word,” and news of a breakdown in talks with the IMF helped weigh heavily on the stock market. There had supposedly been a lot of progress on yet another Greek bailout, but that old, usual uncertainty kicked in as we headed into the weekend. Investors headed for the exits, and we saw Friday close in the red. It was not that bad of a week, though, as the Dow was up 0.3%, the Nasdaq was down 0.3%, and the S&P 500 was flat.
Bulls were particularly disappointed to see the Dow finish below 18,000 and the S&P 500 end the week below 2,100. These were springboard levels that investors thought would get the major indices moving higher, but that was not to be the case. The 50-day moving averages are now 18,006 for the Dow and 2,100 for the S&P 500. And again, it was a big downer for the bullish camp to wrap up the week below those key technical levels. The Nasdaq is still holding up well above its own 50-day moving average of 5,017, so that was the plus of the session from a technical standpoint.
Also weighing on the stock market on Friday was the looming Federal Reserve meeting that takes place next week. Long-term bond yields across the globe have been rising lately, which suggests that the bond market is a bit worried about rising interest rates. The broader economy is looking fairly strong, and that gives the Fed all the more reason to raise short-term rates. We get the official statement on Wednesday afternoon, so it is clear that investors are feeling a bit cautious ahead of this announcement. Economic numbers have been strong enough to give the Fed a “green light” on an interest rate hike, so we will just have to wait to hear what the Fed has to say.
On Friday, we saw that consumer confidence for June rose to 94.6, which topped the expected 91.0, as well as May’s 90.7. This is yet another one of those “good news” numbers that the Fed might use to defend a rate hike. In addition, the Producer Price Index (PPI) rose 0.5%, which was in line with expectations, and it also reversed the previous month’s 0.4% decline. It suggests that the economy is leaning toward inflation rather than deflation, and again, it supports any Fed decision for potential rate hikes as we move toward its meeting next week.
So, if you were Janet Yellen and a Fed member, what would you do next week? That is a very tough question. The economy seems strong, inflation seems tame, and the stock market is floundering, but still near all-time highs. Would a rate hike make sense right now? It would certainly be a good time to hike interest rates when everything seems good. But then again, a rate hike could really rattle stock and bond markets. The last rate hike was more than six years ago, and most market participants have forgotten what rate hikes can do to financial markets.
Rate hikes, or even one single rate hike, tend to create uncertainty, and we all know that markets do not like uncertainty. Alan Greenspan has warned of a “taper tantrum” occurring in stock and bond markets if and when the Fed does raise rates, which might be the main reason the Fed will remain in no hurry to raise rates. The Fed may “suggest” rate hikes, but it seems unlikely to move in that direction anytime soon. Just “suggesting” a rate hike probably has the same impact of actually hiking rates, so we will have to wait and see just what the Fed says on Wednesday.
Friday’s weak close was a big disappointment, though, mainly because investors were thinking that the big bounce we saw this week would have some upside legs. The Friday fade was a downer, and it sets the stage for uncertainty next week. Again, seeing the Dow close out below 18,000 and the S&P 500 finish below 2,100 was an early Summer Bummer. Maybe Janet Yellen and the Fed will come to the rescue next week and say that the Fed has no intention to raise rates until 2016 at the earliest. That would bring the bullish vibe back very quickly, so we will keep our fingers crossed.
Greece is still a wild card, though, as is the recent volatility we are seeing in Chinese stocks. Summer is supposed to be calm, quiet and lazy, but with all of these looming issues, we could see a June behave a whole lot more like a September or an October. The Gorilla wishes each and all a relaxing weekend, and we will just have to wait and see what happens next week. Father’s Day is not until the 21st, so do not worry if you have not yet bought a gift (or if you do not get a gift!). We will be back in action on Monday. So again, have a great weekend!
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