Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.
U.S. stocks were unchanged today, with the S&P 500 (^GSPC +0.29%) finishing up just .01%, while the narrower, price-weighted Dow Jones Industrial Average (^DJI 0.31%) lost 0.10%. Statistically speaking, a hundredth-of-a-percentage-point gain is a wash, but, strictly speaking, it's enough for stocks to record four days of consecutive gains in the first week of September -- which is inconsistent with this month's fearsome reputation. In any event, fundamental investors with a multi-year time horizon know not to pay attention to so-called calendar effects.
In light of today's lack of conviction regarding stocks, it's not surprising that the CBOE Volatility Index (^VIX +0.59%) could only muster a 0.51% rise -- a non-move for the index. The VIX, Wall Street's "fear index," is calculated from S&P 500 option prices, and reflects investor expectations for stock market volatility over the coming 30 days. Nevertheless, I'm expecting big things from the VIX in September -- I wouldn't be at all surprised to see it close above 20, which it has only done twice so far this year (in June).
Jobs, the Fed and the stock market
This morning, I wrote, "while recent economic data has been encouraging, today's employment report will not be what the Fed is looking for if it is seeking confirmation for a decision to taper its bond-buying program."
However, Mark Dow, author of the Behavioral Macro blog, doesn't think this will matter, arguing that there are (at least) three reasons the jobs data won't delay Fed tapering.(The "tapering" refers to a reduction in the Fed's quantitative easing ("QE") program -- $85 billion monthly securities purchases.) Dow is one of the smartest, most rational analysts I've come across, and this piece is the most convincing article I've read in support of the notion that the Fed will go ahead and begin scaling back QE this month. For example, he writes:
The Fed is increasingly cognizant of the data that suggest QE [quantitative easing] has passed through to the real economy much less than its staunchest proponents hoped. At the same time collateral costs -- though far, far smaller than hard money advocates had forecast -- have been creeping higher. At home, markets have been distorted in exchange for less benefit. And abroad, to paraphrase the famous quote from former Treasury Secretary John Connally: The Fed is our monetary policy, but your problem. Both the risk and the reward may have turned out smaller than many hoped/feared but, be that as it may, the risk-reward equation still continues to drift away from more QE. And the Fed gets this.
So, what happens to stocks if the Fed does decide to begin withdrawing QE this month? For all the sturm und drang in global markets since May 22, when the Fed first floated the idea, I think the market's reaction would be a big shoulder shrug. As I have written before, I think a September taper is the consensus view and, as such, is largely embedded in stock prices at this stage.
Nevertheless, between looming political battles over the federal deficit/debt, and a possible military strike against Syria, there are more than enough excuses for a little bit of autumn volatility. Steel yourselves for that possibility and, stock pickers, if there are individual names you'd like to own at the right price, keep your eyes open -- those prices could materialize.
