State of the Stock Market Analysis for the Week Ending September 25th, 2016 (Lowest PMI Levels Since June Raise Economic Concerns 9-25-16)

All You Need Is Jobs

Stocks may have closed out the week on a negative note, but it was a positive week nonetheless. There was some concern about the preliminary Purchasing Managers Index (PMI) coming in at 51.4 versus the expected 52.0, and the fact that was the lowest level since June might have weighed on investor sentiment on Friday. Bulls keep looking for positive economic news, but we just seem to fall a bit short on many of the reports we continue to see. The rough part about the “flash” PMI is that it is drifting back down toward the 50.0 level that signals an economy in contraction.

Friday’s decline was mild, though, and for the week, the major indices did fairly well, with the Dow up 0.8% and the Nasdaq and the S&P 500 up 1.2% each. It was great to see the Nasdaq and the Russell 2000 touch all-time highs this week, and Friday’s downward drift was a disappointment. From a technical standpoint, the major indices still look good, and as long as we can get some decent economic news in the days and weeks ahead, then the broader stock market should respond well. This high-level consolidation is a definite plus.

We survived the Federal Reserve meeting this week, and as much as the Fed seems as though it wanted to raise rates, it lied low and did not sneak in a rate hike. This was expected, but then again, Janet Yellen and the Fed were certainly hinting at a rate hike in a big way over the past few weeks. The economic numbers were just not there to justify a rate hike, and the Fed stood down. It was probably a prudent and smart move, especially with the election just over six weeks away.

The Fed knows all too well what happened with the quarter-point rate hike last December. The S&P 500 subsequently fell by 10%, and as much as the Fed wanted to raise rates at its meeting this past week, it did not want to create a “repeat” of that 10% decline that we saw witnessed this year. The odds of a market meltdown had the Fed raised rates this past week seemed unlikely, but the Fed probably did the right thing on erring on the safer choice of no rate hike. The Fed meets again in November ahead of the election, but any move then seems very unlikely.

So the next chance the Fed has for a rate hike is December, and we will just have to see how the “data” plays out. The economy is clearly not that strong outside of housing, so it will take a lot of positive data to convince this “data driven” Fed to even pull off a December rate hike. Central banks around the world are still playing the same game we have seen over the past eight years, so there is little reason to think any of them, including the U.S. Fed, will change their current policies of zero interest rates and Quantitative Easing anytime soon.

So what does that mean for stocks? While these policies might not be all that great for the “real” economies of the world, these supportive policies are generally great for the stock market. The question that comes up is whether the stock market is driving Fed policy or whether Fed policies are driving the stock market higher. The stock market and financial markets are higher because of an accommodative Fed, but the Fed is terrified to do anything that might hurt financial markets. It works until it doesn’t so we will see how the next few months unfold.

We have a big Presidential debate on Monday, and it will be interesting to see how that battle might affect financial markets. The uncertainty about the election has not had much of an effect on the financial markets, so we can probably expect more calm and cool in reaction to this contentious election. The Gorilla wishes each and all a relaxing weekend and a well deserved break from the financial markets. College football is in full swing, so that, along with raking leaves might be a great way to spend a Saturday. We will back in action on Monday, so again, have a wonderful weekend!

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