If you thought last week was big for the Federal Reserve, this one might be even bigger. With more than 11 scheduled speeches from Fed officials, including Fed Chair Janet Yellen’s address on Tuesday, investors will have many moving pieces to watch.
Meanwhile, Republicans are still pushing ahead for a Senate vote on the Graham-Cassidy health care bill this week, despite a rushed timetable and the increasingly unlikely task of amassing enough votes. Many GOP leaders believe this bill is the last chance to undo Obamacare this year since the deadline to pass health care legislation with a simple 51 majority expires at the end of September.
Health care stocks (XLV) surged on Friday after Senator John McCain (R-Ariz.) announced that he could not vote for the Graham-Cassidy bill “in good conscience.”
- Monday: Dallas Fed Manf. Activity, September (11.5 expected; 17 previously)
- Tuesday: S&P CoreLogic CS 20-City Home Price Index, July (+0.24% expected; +0.11% previously); New Home Sales, August (+590,000 expected; +571,000 previously); Conf. Board Consumer Confidence, September (120 expected; 122.9 previously); Fed Chair Janet Yellen speaks
- Wednesday: Durable Goods Orders, August (+1% expected; -6.80% previously); Pending Home Sales, August (-0.50% expected; -0.80% previously)
- Thursday: Initial jobless claims (+270,000 expected; +259,000 previously); GDP Annualized, Q2 Final (+3.10% expected; +3.00% previously); Advance Goods Trade Balance, August (-$65.1b expected; -$65.1b previously); Kansas City Fed Manf. Activity, September (16 previously)
- Friday: Personal Income, August (+0.20% expected; +0.40% previously); Personal Spending, August (+0.10% expected; +0.30% previously); PCE Deflator YoY, August (+1.50% expected; +1.40% previously); PCE Core YoY, Aug (+1.40% expected; +1.40% previously); University of Michigan consumer sentiment, September (95.3 expected; 95.3 previously); Chicago Purchasing Manager Index, September (58.7 expected; 58.9 previously)
The Hurricane effect
While this week’s data would usually help guide expectations for economic growth, uncertainty around hurricane-related disruptions could create noise. Data on durable goods orders, the trade balance and personal income will be less useful for assessing underlying trends.
Last week, the FOMC signaled the Fed is still on track to raise rates once more this year in December, barring negative surprises. Accordingly, the Street will be closely watching how Fed officials respond to potential dips in the data, especially the Core PCE inflation reading at the end of the week.
“Given anticipated weather-related disruptions to many key ‘hard’ data series over the next couple of months, Fed policymakers may put more weight on business surveys near term in order to gauge the underlying health of the economy,” write Brett Ryan and Matthew Luzzetti of Deutsche Bank Research. “Hence, they take on elevated significance as the Fed considers whether to hike again before year-end.”
Where’s the worry?
Fall is historically one of the roughest periods for stock market. This time around, as we enter autumn, trading volumes are particularly low, and US equities have had outflows for 12 of the past 14 weeks. Yet the markets continue marching higher.
So the big questions remain: Why isn’t there more fear? Why are investors complacent? Where’s the volatility?
One reasonable explanation comes from former Treasury Secretary Larry Summers. As the stock market goes up, a company’s leverage goes down. That’s because the amount of debt they hold looks smaller and smaller compared to their equity.
“The volatility of the market moves very much with the level of the market,” Summers explained on the Conversations with Tyler podcast. “The reason is that if a company has $100 of debt and $100 of equity, and then the stock market goes up, it’s 50/50 levered. If the stock market goes up by $100, then it has $100 of debt and $200 of equity and it’s only one-third levered. So when the stock market goes up, its volatility naturally goes down.”
So higher stock values make companies look more healthy, which lowers investor fears, which begets lower volatility. And all of that allows the market to lazily climb the proverbial wall of worry.
In short, we’re simply in a trend favoring ever lower volatility, more risk taking and higher stock prices. And trends always continue … until they don’t. Everyone knows the good times will eventually end, but the Street pushes the trade to the brink, betting they won’t be left without a chair when the music stops playing.