Minutes Coming Wednesday
With the Fed hinting at an interest rate increase sometime in 2015, the financial
markets have tended to be jittery before any new Fed-related information comes
to light. As noted by The
Wall Street Journal, this week is more than Jackson Hole:
Minutes of the Fed's July meeting, to be released Wednesday, could provide
fresh clues on how officials are thinking. One issue that warrants attention:
Will the Fed in the future target a specific interest rate, as it did before
2008, or an interest rate range, as it does now? The strategy the Fed is
developing strongly suggests it will be the latter at least for a few years.
Handicapping Yellen
On August
18, we hypothesized Janet Yellen may err on the dovish side at this Friday's
gathering in Jackson Hole. MarketWatch provided
a similar outlook:
Federal Reserve Chairwoman Janet Yellen will deliver a simple message
from Jackson Hole this week: Don't be fooled by the sharp drop in the unemployment
rate. Economists expect Yellen to give a master-class explaining why she
believes there is still a lot of slack in the job market...Economists don't
think Yellen will signal any shift in the easy stance of policy at the
conference in western Wyoming. Fed officials remain comfortable with their
guidance that the first rate hike will come sometime in the second half
of next year, said Jan Hatzius, chief economist at Goldman Sachs, in an
interview with MarketWatch.
What Is The Fed Watching?
The Fed has a dual
mandate; keep prices stable while fostering an environment to achieve
maximum employment. The chart below shows interest rates have been held at
low levels in an attempt to jump-start hiring.
While the impact of Fed policy on employment is a subject of constant debate,
the figures published by Uncle Sam do show an improvement in the unemployment
rate.
Support Held Last Week
Since showing the chart below on August
7, the S&P 500 has rallied sharply.
Investment Implications - The Weight Of The Evidence
Based on the improvement in the big picture risk-reward profile for equities,
our market model called for an incremental bump to the growth side of our portfolios
Monday. Tuesday's improvement reached levels calling for another "add" to the
equity side.
The charts below provide a few examples of "observable improvement". On August
14 (left below), the S&P 500 remained below several forms of possible resistance,
including the 50-day moving average and downward-sloping trendline C. This
week, the S&P 500 has successfully cleared both hurdles, telling us the
probability of the current rally carrying further is higher today than it was
on August 14.
Are there hurdles above? Yes, there are always things to be concerned about
both technically and fundamentally. The Fed minutes or something out of Jackson
Hole could either propel the markets higher or spook them into a reversal.
Therefore, we will enter Wednesday's session with a flexible stance.
