Stocks are approaching Wednesday’s open unlike they closed Tuesday, at least at this early hour (4:00 AM EDT). S&P 500 Index futures were relatively unchanged and actually fractionally in the green. A flight to safety was clearly underway Tuesday, with capital flying into U.S. treasuries and precious metals and relative shares, and out of risk assets. But two Fed doves forced a landing, with very dovish discussion on Tuesday. The day ahead is yet undetermined, though trade data might sooth us some more. We’ll be looking at service sector data as well, given its importance to the U.S. economy. But, for as long as it’s September, with North Korea acting so provocatively, a category 5 hurricane approaching the Florida coast, a Fed policy meeting just ahead, and with debt ceiling and government shutdown fears mounting, stocks should again look to safety soon. I’m reiterating my recommendation for investors to raise cash levels, hedge portfolios against risk via volatility instruments (NYSE: VXX) and precious metals (NYSE: GLD), and to reduce risk generally, despite the possibility of a temporary reprieve today.
The S&P 500 Index (NYSE: SPY) dropped by 0.8%, the Dow Jones (NYSE: DIA) fell by 1.1% and the Nasdaq (Nasdaq: QQQ) fell by 0.9% Tuesday, as American investors returned from holiday to find a market in flux and fear. The heat is on, as it is September (see my warning), a poor historical performance period, with a slew of culling catalysts at play for stocks. You can see the flight to safety in the table below. What’s missing here is that the 10-year U.S. treasury yield fell 10 basis points to 2.07%, on demand for treasuries in the flight to safety.
|Security||09-05-17||Premarket 4 AM EDT|
|SPDR S&P 500 (NYSE: SPY)||-0.7%||+0.2%|
|SPDR Dow Jones (NYSE: DIA)||-1.0%||NA|
|PowerShares QQQ (NASDAQ: QQQ)||-0.9%||NA|
|iShares Russell 2000 (NYSE: IWM)||-1.0%||NA|
|Vanguard Total Stock Market (NYSE: VTI)||-0.8%||NA|
|iPath S&P 500 VIX (NYSE: VXX)||+5.5%||NA|
|PowerShares DB US Dollar Bull (NYSE: UUP)||-0.5%||NA|
|PIMCO Active Bond (NYSE: BOND)||+0.4%||NA|
|United States Oil (NYSE: USO)||+2.6%||NA|
|SPDR Gold Trust (NYSE: GLD)||+1.1%||NA|
We are feeling the soothing influence of Neel Kashkari, the Minneapolis Fed President, who yesterday said we need to consider what damage rate hikes have caused the economy to-date. For me, his discussion sounded more like a Wall Street CEO or someone heading that way, than a conservative Fed president. Lael Brainard, a dove’s dove, also implied caution for the Fed, given still apparently absent inflation. The two served to sooth markets yesterday, but I wonder for how long.
I expect that at the Federal Open Market Committee (FOMC) policy meeting in two weeks we’ll see an upgrade to economic growth expectations and a Fed still on track to normalize monetary policy. That message should not fit what we heard yesterday from the two Fed members.
Today’s Data Drivers
The Fed will issue its Beige Book today at 2:00 PM. The Beige Book is a compilation of anecdotal evidence on economic conditions across Fed districts. While yesterday produced very dovish discussion, this data should show economic strengthening. Each serves stocks, for as long as the market continues to not expect a December rate hike.
International trade data is due this morning at 8:30 AM EDT. Combined with data out of China on exports, this data should reflect an improving global economy, and especially in the U.S. and Europe. That means, we should see both imports and exports grow, and the trade deficit should expand. Economists expect the trade deficit widened in the reported period (July) to $44.6 billion, from $43.6 billion in June. It’s good news for stocks if we see what I expect.
ISM’s Non-Manufacturing Index Report is due at 10:00 AM EDT this morning. The service sector dominates the American economy (90%), versus manufacturing, and so this data is important. The Purchasing Managers’ Index (PMI) is expected to show improvement in the service sector, with the PMI rising to 55.8 in August, according to economists, from 53.9 in July.
The U.S. Services Purchasing Managers Index is due from Markit Economics today as well. It is likewise expected to show expansion in the service sector, with its PMI seen rising to 56.9 in August, from 54.7 in July. Again, this is more good news for stocks.
The insurance sector (NYSE: KIE) (NYSE: IAK) and most of the market is under pressure because of the approach of Hurricane Irma, a category 5 and the strongest storm in a decade. Barclays indicates the potential damage from this storm could be the most ever, and it is approaching the Florida coast and the Gulf of Mexico. Also as a result of the storm, shares of Home Depot (NYSE: HD) and Lowe’s (NYSE: LOW) are on the rise, as home and business owners buy materials to safeguard their homes, and also in anticipation of materials purchases for later repairs.
In conclusion, while this day may offer some reprieve, with no North Korean missile launch having occurred yet and with positive data due along with the soothing Fed discussion of yesterday, my forward outlook for September remains one of high concern. I continue to suggest investors raise cash, seek hedges and generally reduce risk. For more of my work on markets, readers are welcomed to follow the column here at Seeking Alpha.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.