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Teton Vacation: Yellen Speech Ahead As Market Digests Last Two Volatile Weeks

August 21, 2017

(Monday Pre-Market) Last year when Fed Chair Janet Yellen addressed investors from Jackson Hole, markets were finishing a dull, placid summer marked only briefly by a flurry of excitement around Brexit. 

How things have changed. Yellen’s speech this coming Friday morning at the Federal Reserve Bank of Kansas City Economic Symposium in Jackson Hole will take place after the markets stumbled through two weeks of late-summer uncertainty that helped send stocks to their worst day in three months last Thursday. Geopolitical fears of terrorism in Europe and saber rattling between North Korea and the U.S. helped bring volatility back into the picture, even as concerns grew about whether President Trump has the political capital to push through a business-friendly agenda.

The title of Yellen’s speech is “Financial Stability,” a topic near and dear to many investors’ hearts. Not surprisingly, however, the title is a bit vague and it’s unclear whether Yellen will make any comments on the markets, the overall economy, or the Fed’s rate hike and balance sheet plans. Last year’s speech turned out to be a yawner that failed to make much impact on the markets. While Yellen did talk about the economy in general terms, she didn’t give much insight into the Fed’s future plans or say anything investors hadn’t already heard on interest rate policy. We’re not in the prediction game, but a similar outcome this year wouldn’t be a shocker.

The futures market, however, is in the business of making predictions, and as of midday Friday CME Group Fed funds futures had odds of a rate hike by the end of the year at 40%, down from 50% not too long ago. There’s little doubt that the last two weeks of political and foreign policy uncertainty have taken their toll, despite strong jobs and retail sales growth. The Fed’s minutes from its July meeting, which sounded less certain about when balance sheet tapering might begin, also played a role in pushing odds down. 

It may seem hard to believe, but CME Group futures actually project a slight chance of a rate cut before the end of the year. It’s just 2%, but it’s there, and that’s a possible sign of the nerves rattling investors now. The new week could continue to have people concerned, especially about developments in Washington. There was a lot of optimism about possible market-friendly legislation going into the year, which helped send stocks to historic highs. Now, amid the uncertainty, some of that seems to be getting dialed back.

Weakness in the Russell 2000 (RUT), an index of mostly smaller stocks, is also causing concern. These stocks tend to be less export-oriented than their larger counterparts, so any signs of trouble with those names could bring insight into the state of the U.S. economy. The RUT is now about flat for the year.

Don’t completely discount the chance of news coming from Jackson Hole. Typically investors get one or two good pieces of noise out of the Fed during the conference, and there’s always the chance of a major company making an announcement.

One metric the Fed is said to watch closely is the housing market, and the coming week brings two key reports on that aspect of the economy with new home sales for July on the calendar Wednesday morning followed by existing home sales early Thursday. Last week’s housing starts and building permits numbers came in way below analysts’ expectations, and June new home and existing home sales were a mixed bag.

The other key data coming up is durable orders, which, like home sales, can serve as something of a synthetic consumer confidence indicator. Durable orders surged in June and we’ll see if that flowed over into July when the report comes out next Friday.

It’s tempting to think we’re done with earnings, but a few stragglers will report this coming week. Toll Brothers (TOL), the luxury homebuilder, opens its books Tuesday. That could be good timing ahead of the government reports on housing. Others to watch include Lowe’s (LOW), Tiffany (TIF), Marvell (MRVL), and Brocade (BRCD). Still, earnings are more than 90% over, so it’s safe to say that like Alaska King salmon, they’re no longer in season. 

Something else to watch as the new week dawns is whether more of the flight-to-safety kind of trade that perked up late last week starts buzzing again. Bonds did step back a bit by midday Friday, and gold retreated below $1,300 an ounce while VIX fell back toward 14 after nearing 16 on Thursday. Some investors started taking a chance on less defensive stock market sectors as Friday rolled along. At times like these, however, it’s not a good idea to get too sanguine. Remember to monitor volatility and consider taking extra care before getting into new positions.

S&P 500


Though it feels like it’s been a really bad month, perception means a lot. The last two weeks have been tough, but as this one-month chart demonstrates, major stock indices are mixed for August, with the Dow Jones Industrial Average ($DJI) actually up since Aug. 1 through midday Friday. Nasdaq has taken the worst beating. Data sources: Nasdaq, Standard & Poor’s, Dow Jones & Co. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.    

Washington Swirl: Looking toward Washington, D.C., we’re hearing renewed concerns about how quickly Congress could move on its legislative agenda. President Trump disbanded his CEO advisory groups amid controversy over the events in Charlottesville, Va., raising concern that big-ticket items like infrastructure and tax reform might face a harder road. Many investors have been hoping that progress on those fronts could give the market an additional boost this year. However, some of those expectations (like hopes for 2017 tax reform) had already been waning even before last week. It’s more concerning if Congress can’t get anything done on tax reform in 2018.

Looking for Explanations: There’s no single “smoking gun” behind the weakness we saw late last week, though concerns about the Trump economic agenda and whether it can move through Congress remain a thorn in the market’s side. Now we’ve had two tough weeks in a row, one in which geopolitics roughed up the market and the second in which domestic politics and disappointing earnings from some key companies played a role. This coming week the Fed steps into the spotlight, and it should be interesting to see where we are by Friday when Yellen approaches the lectern.

Wake-up Call: One worry about the markets this summer is a sense of complacency among some investors. There’s a general sense that every time the market goes down, people can just buy the dip and things will work out. While that’s certainly a calming thought, it’s troublesome if investors use it as an excuse to get too bullish or fail to take protective action through portfolio diversification. A couple weeks ago, we mentioned this might be a good time to check your portfolio and make sure this year’s rally in stocks hadn’t caused stock positions to go above percentages you might be comfortable holding. If the last two weeks didn’t already convince you to check, don’t wait any longer. Consider how much risk you want to take on as volatility starts kicking up amid the uncertainty both at home and abroad.

Good Trading,

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