(Monday Market Open) Here we go again. The markets appear to be starting the week and the session in waiting mode, postponing any market moves ahead of at least two important speeches this week.
Tomorrow night, President Trump is addressing Congress for the first time since he was sworn into office. Investors may be waiting to see if he will outline his policy priorities.
And on Friday, Federal Reserve Chair Janet Yellen is scheduled to be the last of Fed members to speak ahead of its self-imposed blackout before the next Federal Open Market Committee meeting March 15. The CME Group’s FedWatch tool is still leaning away from a probability of a hike by March, at 26.6%, though that has edged up in recent sessions. The likelihood is just barely above the 50% point for a rate hike by May with July as the next meeting month currently holding the highest probability, at 72.9%.
At the open, the three major benchmarks were all trading marginally lower. As of Friday, both the Dow Jones Industrials (DJX) and the S&P 500 (SPX) closed at record levels and logged their 53rd straight sessions of moves under 1% in either direction. Remember those under-1% fluctuations during the dog days of summer? It may have seemed like endless days of lackluster performance then, but the indexes weren’t mostly going up—some days they just sat flat. In fact, according to Dow Jones, the SPX hasn’t had this long of a string of little bumps since July 2014 while the DJX hasn’t in 10 years.
Speaking of flat, keep an eye on the CBOE Volatility Index (VIX). It’s barely budged since mid December, and closed Friday at 11.47, below its 200-day moving average of 13.80 but nearly on par with its 50-day moving average.
This index, informally known as Wall Street’s “fear gauge,” is a barometer of investor sentiment and near-term market volatility based on SPX stock option prices. It’s built to reflect volatility, meaning that as the markets hit all-time highs, it typically goes lower.
But it’s something that the Federal Reserve is worried about, according to the minutes of the Federal Open Market Committee meeting released last week. In them, the Fed noted that despite the “substantial uncertainty about potential changes in fiscal, regulatory, and other government policies…measures of implied volatility of various asset prices remained low.”
Why would the Fed be so concerned? It is likely because the Fed, which has stated it wants to slowly raise interest rates, doesn’t want to see a huge spike in the VIX. When that happens, investors typically flock to safe-haven bonds, raising their prices. Bond prices and yields move in opposite directions, and that would mean yields would drop, in essence foiling the Fed’s hopes of hiking interest rates. Let’s see how this plays out.
Defensive Sectors Get Some Love: As February draws toward a close, it’s worth checking to see which sectors have been leading this historic rally. Over the last month, favored sectors continue to be the ones that saw strength late last year as the post-election rally gained steam, with financials and info tech among the leaders on the month, though they lagged last week.
Some traditionally “defensive” sectors like health care, utilities, and consumer staples also posted big gains over the last month, outpacing materials and industrials. It may be a sign of defensive stocks coming back into favor a bit. Bonds and gold are also on the rise, perhaps another indication of some investors looking for places other than growth stocks in which to put their money.
Heavy Week Ahead: This week marks the start of a new month and the onset of a busy economic calendar. Key statistics out this morning include two major economic reports—the January durable goods orders and the National Association of Realtors’ pending home sales. Also on the docket this week is the government’s second estimate for Q4 gross domestic product (GDP) on Tuesday and personal consumption expenditures (PCE) prices on Wednesday. The Fed tends to consider PCE prices as an inflation indicator, and PCE price growth has trailed growth in the consumer price index (CPI) over the last year. We’ll see if that pattern continues as well.
Wait a Little Longer for Jobs Update: February is a short month, which means that next important monthly jobs report won’t come out the first Friday of March, but rather the second Friday. That means investors will need to wait until March 10 to get the latest update on job creation.
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