State of the Stock Market Analysis for the Week Ending August 21st, 2016 (Summer Heat Brings a Calm WeekĀ 8-21-16) All You Need Is Jobs

With all three major indices finishing Friday slightly lower, it rounded out a quiet week that was essentially flat. It was no surprise as there were just no big news items or earnings reports to send stocks up or down in any big way. This market is looking for a catalyst or two, but there were no major ones for this next-to-the-last week of August. Late summer is historically a quiet time for the stock market, since many institutional players and regular investors are on vacation, so the flat and quiet week we saw this past week was basically a “normal” week for late August.

The week began with hawkish comments from New York Federal Reserve President Bill Dudley hinting that a Fed rate hike was still on the table for its September meeting. Later in the week we saw the Fed’s minutes from its last meeting, and it showed a divided Fed that had some members promoting a rate hike while the majority of members sounded fairly dovish on a September rate hike. This mixed message helped keep buyers and sellers on hold, and it helped explain why we had such a calm, cool and flat week in the stock market.

We have the Presidential Election taking place in early November, and the Federal Reserve has only two chances to raise rates ahead of that election. The first is in late-September and the second would be in early November just before the election. The Fed does not like to be a “king” or “queen” maker, so the consensus is that a rate hike in either of those two meetings seems very unlikely. The 10% selloff that we saw in the S&P 500 in January and February comes to mind, and with a contentious election in play, the Fed would probably prefer to lay low.

A big selloff in stocks would likely spook voters, which would benefit an outsider like Trump. Keeping stocks steady and calm near all-time highs would likely benefit Clinton and the current “status quo,” since a stock market at all-time highs “feels” steady to many voters. The Fed would likely not want to be blamed for any non-prudent moves, so most strategists and Fed watchers are siding with the “no action” mantra right now. A strong jobs number at the beginning of September COULD give the Fed a “green light” for a rate hike, but the consensus is leaning toward no hikes at least until December.

This current picture is in stark contrast to eight years ago when we had markets melt down following the Lehman Brothers collapse in October of 2008. The Fed reacted back then with rate cuts and the TARP bailout, and that could have helped Obama amidst all of the market turmoil. Voters and investors (and Wall Street) were scared pretty badly, and the vote for “change” in November of 2008 took hold. We do not have any major crises in the making right now, and the Fed certainly does not want to create a ruckus ahead of the 2016 election.

All eyes will be on Jackson Hole, Wyoming next week when the Fed heads and various banker-types meet regarding the economy and economic policy. So the spotlight will be on that beautiful mountain region. Janet Yellen is scheduled to speak on Friday, and it will be a closely-watched speech. She has a chance to send a clear message on the Fed’s intentions for the rest of the year, but again, she will likely have neutral comments that will not affect global financial markets. The spotlight will be on her, but in reality, she likely will keep her comments calm, cool and collected.

Whichever party wins in November, it looks as though the broader financial markets will take the whole process in stride. Neither party is likely to introduce any radical changes, and that is exactly what investment markets like to see. If anything, the stock market seems to work well when Washington is divided and confused. That said, it was a calm but productive week for the stock market even though it finished flat. The Gorilla wishes each and all a relaxing August weekend. Enjoy the calm right now because the run toward the end of the year promises to be challenging and interesting to say the least. Again, have a great weekend!

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