Out Of Batteries

Out of batteries.   Stocks sold off yesterday with relentless selling throughout the session. Investors are growing more concerned about a rebound in COVID cases as we approach a contentious election with little apparent willingness on the part of Congress to enact new stimulus.

 

N O T E W O R T H Y

 

Read our lips.  I usually add a bullet in my NXT UP section containing Fed speaker schedules.  I do that for a reason, though I suspect that many readers don’t put it high on their priority lists.  It is understandable. Fed Governors aren’t exactly the most exciting folks to watch and the contents of their speeches are usually fraught with boring, and sometimes hard to understand metrics.  But I need to make one thing clear.  The Governors speak frequently for one primary reason: guidance.  They are out on the speaking circuit to carry the Fed’s policy message.  Of course, they don’t simply read the ambiguous statement, but rather, they weave the message into whatever topic they are speaking about, however mundane it may be.  One can read the official statement here:  https://www.federalreserve.gov/newsevents/pressreleases/monetary20200916a.htm , and you may have to read through it several times before you get the message.  Don’t worry if you only get through the first few lines, because as soon as the press blackout period ends, which is officially on midnight of the Thursday after the meeting, the Chairman’s disciples spread throughout the districts to amplify the message.  Yesterday was one of those days where the Fed speakers were out en force. Though yesterday’s selloff was tipped off by a number of factors, the majority of the selling was in response to what they were hearing by Fed speakers.  The message that they carried was clear.  1) Rates will remain low for some time, 2) the Fed will continue to purchase securities (QE), 3) fiscal stimulus is needed to support the recovery, and 4) pretty much… nothing else.  On the surface, nothing has changed from last month’s message, but what has changed is the environment.  Low rates and QE may be good to help support weak companies in tough times, but only fiscal stimulus will help bring revenues back and drive prices up.  As we head into elections, it has become imminently clear that both political parties have little motivation to agree on a new fiscal stimulus package.  A controversial upcoming election combined with heightened partisanship related to deceased Justice Ruth Bader Ginsburg almost guarantees that the item on top of the Fed’s wish list is simply not in the cards.  Markets appear to be reconciling with that very fact, which was made quite clear in all of the Fed’s speaking yesterday, from the Chairman on down the line.  I am sure that lawmakers are acutely aware of the powerful card that they hold, which is probably why they are keeping those cards close… very close to the vest.  Markets like what they have been hearing from the Fed, but it is what they are not hearing from Congress that has them on edge.

 

The hills in the distance. 

Nervous about your portfolio and the outcome of the election? Don’t worry, it is quite normal. Around this time in every election year, traders begin to anticipate volatility in the markets.  You can watch VIX futures begin to rise in the run-up to election day.  Recall that the VIX index is calculated using the volatility of S&P500 futures contracts in the upcoming month.  The way in which the VIX is calculated makes it a go-to hedging vehicle for many institutional money managers.  As many of them expect market volatility to peak at the election, many traders will start to purchase VIX futures leading up to November, election month.  By observing futures, we typically see a rise which peaks in October, followed by a decline.  This election year we are seeing something a bit different. Currently, the September contract is at 26, followed by 32 for October, 33 for November, 32 for December, and 31 for January.  We see that the “kink” in the futures curve is in November and December… which typically occurs in September and October.  This can be interpreted as traders believing that there may be volatility following the election, resulting from contentious results.

 

THE MARKETS

 

Stocks dropped sharply yesterday led by technology shares. Lawmakers lacking the motivation to provide further stimulus, a stationary Fed, and the potential for a “third wave” contributed to the selling.  The S&P500 dipped by -2.37%, the Dow Jones Industrial Average dropped by -1.92, the Russell 2000 Index fell by -3.04%, and the Nasdaq Composite Index gave up -3.02%. Bonds also slipped on economic worries while 10-year treasury yields were unchanged at 0.67%. Gold dropped below $1,900 yesterday in response to Congress’ unwillingness to stimulate the economy, which would mean lower potential inflation.

 

NXT UP

 

– Initial Jobless Claims (Sept 19) is expected to come in at 840k, down from last week’s 860k claims.

– Continuing Jobless Claims (Sept 12) are expected to be 12.275 million, down from the prior read 12.628 million.

– New Home Sales (Aug) may have slipped by -1.2%, compared to last month’s +13.9% gain.

– Chairman Powell will join Treasury Secretary Stephen Mnuchin to address lawmakers for a third day today.  Other Fed speakers include Kaplan, Bullard, Evans, Barkin, Williams, and Bostic.  See above for why you should watch the tape for their quotes.

 

 

daily chartbook 2020-09-24

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