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Will We See a Reprise of Last Summer?

Last summer was a season fraught with challenge.   In June of last year the Fed announced the end of Quantitative Easing as we knew it and everyone thought the sky was falling.   It seemed as though each time a Fed member spoke it made the news and moved the markets.

The markets were rising on bad news as that meant the Fed wouldn’t be too keen to taper, right?   I remember being on a panel last August with some esteemed colleagues of the trading world.   Each member on that panel thought the Fed would taper in September.   Didn’t happen.

In fact the only person who said the Fed would wait until the end of the year or beginning of next was the writer of this newsletter.   Believe me I took a lot of grief for that but am glad I stood by my guns.   This past Wednesday we had 3 Fed members speaking in different locations, including Janet Yellen and ironically this coincided with the release of the FOMC Meeting Minutes.     Fortunately the FOMC Meeting minutes didn’t reveal anything new, so there was no shock to the markets.   In fact the Dow gained 159 points that day.

On Thursday the Dow gained a mere 10 points and on Friday it gained 63. The S&P hit the proverbial 1900 mark for the first time ever. This weekend marks Memorial Day in the United States and is considered the unofficial start of summer. Already on Friday it seemed as though the markets weren’t moving at all in the afternoon. Traders typically want to head for the exit doors early on Friday in the summer and the closer we get to the Labor Day holiday the more erratic trading we’ll see. This is because the interns have taken over and the more experienced smart money traders are away on holiday. We also see this phenomena occur after Labor Day as if those institutional aka smart money traders didn’t take holiday during July or August, they will certainly do so after the Labor Day holiday.

Given that the fate of Quantitative Easing is already known, the question is will we see the same type situation as we witnessed last summer; only this time the emphasis will be on interest rates versus QE? I certainly think it’s possible. The markets always need something to drive it and if it isn’t an economic report then it will be on a future concern aka interest rate hikes. Is it possible that bad economic news could bolster the markets? We saw this last summer whereby the markets went up on bad economic news. After all, why would the Fed taper if the news was bad? We could very well see this type of situation occur this summer only the concern will be interest rate hikes. I personally don’t think that will happen sooner as Janet Yellen is well aware that the economy is not quite where it needs to be at the present time. She knows long term unemployment is still too high even though the official rate is 6.3%. She’s also aware that if the Fed raises rates sooner as opposed to later, consumer spending will drop and could potentially throw the US economy into recession, which no one wants on their watch. If anyone thought the unemployment rate was high at 6.3%, it will go higher very fast should that scenario occur.

What I find to be disturbing more than anything else is there doesn’t seem to be one unified plan on how to get the US economy moving again. Everyone seems to be perfectly fine with less than stellar GDP. After all, Wall Street doing fine, isn’t it? Didn’t we just hit 1900 on the S&P? There’s no “New Deal” or “Square Deal” blueprint moving forward.

If you look at business history, each time the economy depended upon the stock market to pull them out of an economic downturn, they were sorely disappointed as the markets are the first ones out the exit doors when things get really tough. Ironically the markets are usually the last ones to drop off dramatically and only do so when there’s no other recourse. This happened in 1929. That previous summer all indicators were on for a recession. Inventories were being stockpiled; GDP wasn’t as high as in previous periods and the markets moved up. The same thing happened as recently as 2008. Bear Sterns went belly up, Washington Mutual went up for sale and it took Lehman Bros. filing bankruptcy for everyone to take notice. Of course by then the markets were dropping 1,000 points per day.

No, the Fed knows that if they don’t get this just right, the US economy could easily fall into recession. Only this time the ramifications will be far worse as this last “recovery” was jobless at best.

Nick Mastrandrea

Nick Mastrandrea

Mastrandrea is the author of Market Tea Leaves. Market Tea Leaves is a free, daily newsletter that discuses and teaches market correlation. Market Tea Leaves is published daily, pre-market in the United States. Interested in Market Correlation? Want to learn more? Signup and receive Market Tea Leaves each day prior to market open. As a subscriber, you’ll also receive our daily Market Bias video that is only available to subscribers.