Federal Reserve Ethics

The author says that with another Federal Open Market Committee meeting coming up Wednesday, he expects that the Federal Reserve will wait until November before pulling the trigger on tapering. That will cheer up most investors.

It has been a bumpy week for stocks, and it could get worse if you believe the headlines of the financial press. The issue I see is that just about everyone is expecting a nasty period ahead for equities. That makes me somewhat bullish.

Calling short-term market moves in this environment is akin to fortunetelling. It is short on analysis and long on my gut feelings.

Granted, I too, have been warning folks that the September-October 2021 time period has been a seasonally difficult time for equities. My column last week addressed the possibility of a 5 to 10 percent correction, and what investors should do about it.

The media now has proclaimed that we are entering a “danger zone” for stocks, which stretches through the end of the month. Sept. 17, 2021, is also widely expected to be extremely volatile. It is a “quadruple witching” day, when derivatives of stock index futures, stock index options and single futures expire simultaneously. This event happens once every quarter, on the third Friday of March, June, September and December.

It is usually a big-volume day in the markets. Individual stocks and indexes sometimes see large price swings during the day and into the last hour of trading. The media has everyone worked up that somehow the “danger zone,” combined with “quadruple witching,” spell doom for the markets. I beg to differ. While volatile, these events have proved to have little impact on the markets after the one-day expiration. Losses are usually recouped throughout the following days.

The contrarian in me also wonders how useful it is to worry about the next two weeks in the market. When everyone else is on one side of the boat, I tend to lean the other way. Headlines like “investors brace for more September volatility” just adds to the noise, and leaves little left to discount on the downside, at least for now.

What could move the markets higher? Well, we have another Federal Open Market Committee meeting coming up Wednesday. I expect the Fed will wait until November before pulling the trigger on tapering. That will cheer up most investors.

There was also some good news on the economic front.

As most readers are aware, U.S. consumer spending is a massive part of the gross domestic product of this country (about 70 percent). Thanks to the pandemic, incomes were boosted by fiscal stimulus while, at the same time, spending was depressed amid the lockdowns.

Economists believe that, as a result, consumers’ savings have accumulated to the tune of $2.4 trillion or more. That is a lot of firepower, and leaves the typical consumer with a combination of extra cash and lower debt.

That thesis came home to roost this week. Consumers defied expectations and went shopping. Retail sales in August 2021 jumped 0.7 percent, which surprised the markets, since consumer confidence readings had been falling sharply in recent weeks. That led most economists to expect a decline of 0.7 percent.

It seems that those rising incomes, employment and accumulated savings kept the consumer shopping, despite fears about the delta variant.

The S&P 500 Index is at an important level, hovering just below its 50-day moving average. This has happened several times since March 2020, and each time, buyers appeared to “buy the dip.” I suspect they will again, so, no, I won’t get bearish quite yet.

I will go the other way and predict that markets will bounce next week. But, what if I am wrong? Technically, the downside risk could be another 80 points (1.8 percent), to around the 4,365 level on the S&P 500 Index.

Bill Schmick is registered as an investment adviser representative of Onota Partners Inc. in the Berkshires. He can be reached at 413-347-2401, or email him at billiams1948@gmail.com.