State of the Stock Market Analysis for the Week Ending May 22th, 2016 (The Market Leaves Investors Scratching HeadsĀ  5-22-16) All You Need Is Jobs

It was one of those up and down weeks on Wall Street that left investors scratching their heads. We had good economic news and not-so-good economic news this week, but the bulls were pleased to see stocks close out Friday to the upside. Better-than-expected existing home sales set the tone Friday, and the increase of 1.7% in April, to an annual rate of 5.45 million, topped estimates of 5.41 million and March’s 5.36 million. It was just a good enough number to suggest that the economy was still strong and that consumers were still buying homes at a solid pace. Friday’s gains helped the stock market finish with weekly gains of 0.3% for the S&P 500 and 1.1% for the Nasdaq. The Dow, however, was down by 0.2% for the week.

Economic news continues to come in mixed, and that has investors and the broader stock market on edge. We began the month with a dismal employment report that showed only 160,000 new jobs for April, which was well below expectations. The buzz was that the economy was weakening and that the likelihood of a Fed rate hike was off the table for June. Throughout the month, though, we have seen enough positive economic news that a June Federal Reserve rate hike actually is still a possibility. Comments from various Fed Heads over the past couple of weeks suggest that the Fed still wants to raise rates.

The strange thing we heard from the Fed’s “minutes” of its April 26-27 meeting was that the Fed was surprised by the “complacency” in the stock market despite the possibility of rate hikes. The Fed seems to have forgotten the 10% market drawdown that followed the Fed’s 25 basis-point rate hike in December. This was a very strange comment from an institution that could easily send the stock market into a nose-dive with a hawkish comment or two saying that it might raise rates by 50 basis points before the end of the year. Keep in mind that the Fed has raised rates only a quarter point since 2009, so even hinting at multiple rate hikes could panic global financial markets.

But the stock market did close out the week with a win, and that had bulls feeling optimistic about next week. We will get the revised first quarter GDP number next Friday, and economists are expecting an increase to a 0.9% rate versus the initial 0.5% rise we recently saw. This is a big report because the 0.5% rate was so awful. As a matter of fact, 0.9% is still pretty weak, so any shortfall that we might see next Friday could send the stock market lower. Here we are, seven years into an economic “recovery” and growth is still below 1%. And oddly enough, we have a Federal Reserve suggesting that it might RAISE interest rates.

This explains why the stock market has stalled out from its post-February rally. The S&P 500 hit the wall around the 2,100 level in April and pulled back to its current 2,052 level. Friday’s positive market action put the S&P 500 back above its 50-day moving average of 2,048 and above its 200-day moving average of 2,024. This was a big plus from a technical standpoint, and the bulls are hoping the broader market can build on these gains next week. We will need to see more positive economic news, however, and that is the key to keeping this week’s bounce heading toward higher upside levels.

The Federal Reserve is in an interesting position right now, mainly because earnings season is pretty much done and economic news is light. If the Fed wants to roll out a few Fed Heads and comment on the economy and interest rates, then now is the time. Its hints at a June rate hike were somewhat surprising in the minutes we saw this week, but in some ways, a rate hike in June makes sense. The Fed would not want to “rock the boat” ahead of what COULD be a close Presidential election in November, so again, a June rate hike COULD be in the cards. The Fed’s “complacency” comment could come back to haunt it, though, because a June rate hike could rattle the stock market.

It will be an interesting summer season, to say the least. The stock market will have to digest two political conventions that look as though they could be extremely chaotic. We also have the “Brexit” vote in England coming up in early June that will determine if the British want to leave the EU. These political “wild cards” could affect financial markets dramatically, so keep your seat belts fastened tightly. Stocks are essentially flat for the year, so any sort of good news would be welcomed. That said, the Gorilla wishes each and all a wonderful weekend. We will be back in action on Monday, and enjoy the break from a very challenging stock market.

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