Weighty Decision

August 7, 2016

Weekly Market Outlook

By Keith Schneider


Equity markets moved higher this week after an early retreat from digesting monster gains since Brexit. It awoke Thursday and Friday and managed to close up around 1% here in the US. Both the S&P 500 and NASDQ closed at new record highs spurred on by a good jobs report with the unemployment rate staying at a very low 4.9%.

The big question is just when will the fed raise rates if the economy continues to chug along. This has huge implications for the markets. The December 16 ,2015 rate rise caused a market meltdown two weeks later which took three months to recover from.

A growing economy along with US stocks at record highs does not bode well for Trump, unless the Fed raises rates and upsets this very old bull market. Tanking the markets could put Trump in office. Here is the math. The last 7 out of 8 times the stock market fell 3 months before the presidential election, the incumbent party lost.

If Yellen needs moral support at holding rates at current levels for the good of the Republic and so as not to be accused of playing partisan politics, she can look no further than her Ivy League associates where she once taught. This week the Harvard Republican Club announced that it will not support Trump because he is a” threat to the survival of the republic”. This is the first time in 128 years that this elite club has not supported the Republican nominee. If the Harvard Republicans are right, a very heavy weight is sitting on our Fed Chairman, whereby monetary policy becomes a global survival issue.

Considering the fact that Yellen is a democrat but not known for being a hardcore ideologue, it still seems unlikely that she would raise rates right now. If the good economic numbers keep going, December seems more likely considering the stakes. This scenario is supportive to stocks assuming some other black swan doesn’t pay us a visit.

As stocks made sharp gains Friday, US Treasuries and Utilities retreated, but not Junk debt, which eked out a small gain, affirming risk on.

The unusual compressed action over the past several weeks was finally pierced with a small head fake lower before convincingly busting out to new highs Friday, leading one to conclude if the small few day correction is all the equities market can muster to the downside there is more buck to be made in this bull.

The disparity between the Eurozone markets and the US is still very much alive but what is finally reversing is four plus years of underperformance in emerging markets (EEM) as they are waking up from a deep sleep.