AMERIPRISE FINANCIAL, INC. 09/02/2014 | David Joy
The annual speculation about what September and October hold for U.S. stocks is well underway. Whether these two months deserve their reputation as scary for investors is certainly open to debate.
But, with vacations having ended, investors are once again focused squarely on their portfolios, and there are plenty of issues to ponder. The Federal Reserve's quantitative easing program, QE3, winds down next month; the crisis in Ukraine threatens to deteriorate; and Europe is inching closer to deflation.
Yet stocks in the U.S. are at record highs. The Fed hasn't tightened yet, the economy seems to be improving, earnings growth has been good, and the European Central Bank may be preparing its own version of quantitative easing. How these competing influences get resolved will determine whether the next two months are benign for investors or are unkind.
If investors are worried that the Fed may have to raise rates sooner than the June 2015 consensus, then this holiday-shortened week provides them with plenty of data points over which to stress.
Friday's August jobs report tops the list. According to Bloomberg, the consensus is expecting 225,000 new non-farm jobs and the unemployment rate falling to 6.1 percent. If that, indeed, is what the report shows, expect investors to largely look beyond it. But, if the pace of job creation is meaningfully stronger, and the hourly earnings component firms, expect anxiety over the prospect of Fed tightening to rise ahead of its next meeting on September 16-17.
Before we get to Friday, the economic calendar contains other potentially anxiety-inducing reports, including ISM manufacturing and services, the Fed Beige Book, and motor vehicle sales. It is the middle ground for the economy that investors would most like to see. Too robust and the Fed is back in play. Too weak and earnings worries and disinflation fears will begin to surface.
European Markets Await News from the ECB
Recent reports from the Eurozone have shown a continued slowing of both economic activity and prevailing prices. The European Central Bank (ECB) meets on Thursday, and some expect it to announce some form of additional stimulus. Yet, the bank has maintained a deliberate pace in its efforts to stimulate the Eurozone economy and may decide to wait a while longer to see if its earlier initiatives are making a difference.
If it decides to wait, markets will be disappointed. And the rising bellicosity in Ukraine will weigh even more heavily on investors. The question for Eurozone markets is whether the prospect of quantitative easing by the ECB down the road is enough to offset the negative headlines. Recently, that appears to have been the case.
Bond yields fell in both the U.S. and the Eurozone last week. The ten-year U.S. Treasury yield fell to its lowest weekly close of the year at 2.34, down from 2.40 percent the previous week. And the yield on the two-year note fell to 0.47 from 0.49 percent. The German ten-year yield fell to 0.89 on Friday from 0.98 percent the previous week, after touching a record low of 0.87 percent on Wednesday. And yields at the short end of the curve have turned negative throughout the Eurozone.
By comparison, U.S. bonds yields are more than competitive, and no doubt attracting global inflows. The dynamic of soft global growth, the absence of pricing pressures, and the anticipation of additional central bank stimulus in the Eurozone and Japan is exerting downward pressure on U.S. yields at the same time that the domestic economic data is improving and quantitative easing is coming to an end. This set of conditions has proven rewarding for U.S. investors throughout the summer. Instead of "sell in May and go away," U.S. equity investors have been rewarded with price gains in June and August resulting in a three-month gain of 4.1 percent in the S&P 500. The Barclays Aggregate Bond Index delivered a 0.9 percent return for the three summer months, with the longest maturities delivering the best returns.
Whether these benign conditions can persist, of course, depends on the outcome of the competing forces referred to above. And that will determine whether September and October are hospitable or nasty.
Important Disclosures:
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.
The Standard & Poor's (S&P) 500 Index tracks the performance of 500 widely held, large-capitalization U.S. stocks.
The Barclays Aggregate Bond Index is a market value-weighted index that tracks the daily price, coupon, pay-downs, and total return performance of fixed-rate, publicly placed, dollar-denominated, and non-convertible investment grade debt issues with at least $250 million par amount outstanding and with at least one year to final maturity.
Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution and involve investment risks including possible loss of principal and fluctuation in value.
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