New York: What had been just a sleepy August is turning into an increasingly painful one for US equity market bulls.
Notwithstanding an hourlong burst of optimism that followed Federal Reserve Chair Janet Yellen’s policy speech Friday, the buoyancy that lifted stocks for the first half of the summer has now been missing for the better part of a month. The S&P 500 Index fell 0.7 per cent to 2,169.04 this week, the biggest drop since June, to erase its August gains.
Not since the presidential administration of Lyndon B. Johnson have stocks done so little for so long. Unable to break out of a 1.5 per cent band for more than 30 days, the market is locked in its tightest trading range since the end of 1965 amid confusion about Federal Reserve policy and the outlook for earnings.
While losses remain tiny day to day, they’re starting to pile up, with the S&P 500 declining in five of the last six sessions. The Dow Jones Industrial Average slipped 157.17 points in the week to 18,395.4, while the Nasdaq Composite Index retreated 0.4 per cent to 5,218.92. At about 5.8 billion shares, daily volume in US exchanges was lower this week than in any non-holiday period since June 2015.
“Once we dug into the report from Yellen, it was kind of a non-event, and we’re ending in the same range we started the week,” Chris Gaffney, president of world markets at St. Louis-based EverBank, said by phone. “The data we got this week was mixed. There’s no clear direction and that’s why we’re sitting in these ranges.”
Yellen’s comments from Jackson Hole did little to assuage a market looking for clarity amid recent hawkish remarks from Fed officials and uneven data. Her bullish economic assessment was followed by comments from Fed vice-chairman Stanley Fischer, who said nothing in the speech was inconsistent with a possible September rate hike. That sent the S&P 500 tumbling 20 points in 30 minutes.
The main US equity benchmark ended the week with its first three-day slide in two months, interrupting a period of calm that had the CBOE Volatility Index on track for its lowest mean level for any August since 1994. The measure of market turbulence known as the VIX rose 20 per cent in the five days to reach a seven-week high.
Reports earlier showed a surge in American new-home sales, but a slowdown in manufacturing. Meanwhile, data Friday revealed the US economy grew less than previously reported last quarter, and consumer confidence eased in August to a four-month low as Americans grew less optimistic about their finances for the year ahead.
Expectations for a rate increase climbed after Fischer spoke, with traders pricing in a 42 per cent probability of a move next month, and a nearly 65 per cent chance the central bank will act by December. That’s up from 42 per cent two weeks ago, based on fed fund futures data compiled by Bloomberg.
“A lot of people out there came into this expecting a lot of hawkishness from her, saying they’d raise rates in September, but she didn’t,” said John Canally, chief economic strategist at LPL Financial, which oversees about $479 billion in Boston. “They’re not going to be raising rates a lot and it will be gradual rate hikes, which is good for risk assets.”
Beneath the surface of a sideways market, leadership has been shifting away from defensive industries that have led the S&P 500. It was financials and technology — not utilities or household goods — that eked out a gain on the week. Meanwhile, utilities and consumer staples sank more than 1.1 per cent. Health care shares dropped 1.8 per cent.
As the earnings season wraps up, almost 80 per cent of S&P 500 companies have beaten profit estimates, while 55 per cent topped sales expectations. Analysts estimate third-quarter income for the gauge’s members will contract for a sixth-straight quarter, forecasting a 1.3 per cent decline.
“The market is in a degree of a sweet spot,” said Bill Merz, senior investment strategist at the Private Client Reserve at US Bank in Minneapolis, Minnesota. “We have low rates, slow but stable economic growth and extremely low volatility. That’s an environment that really allows for a gradual grind higher and persistence of relatively high valuations.”
