What is there to say when there is too much to talk about? Stock market gyrations are clearly the focus of the week and nearly overshadows much of the macro data points that were also announced…at least in the minds of traders. When the tape itself has more informational value than any fundamental data, abnormal market action can occur. This week in the S&P 500 was a series of case-in-points. Below is a chart of the S&P 500 showing the intra-day movements from Monday through the early hours of trading on Friday. You see sharp intra-day reversals over and over in very high volume days, especially for August which seasonally is a slower month. A less mindful trader who is making allocation decisions during the course of a day faces a significant risk of whiplash. Consider Tuesday when the market gapped up 2% at open but then reversed to close the day down 2%. A perfectly mistimed trader may face a 4% loss of capital when the benchmark impact is half. This does not even speak to the peculiar activity at the individual security level (single stock or exchange traded fund) which might fall precipitously (10-30%) only to correct minutes later as it did on Monday.
Fundamentally, spirits were buoyed this week as US GDP for the second quarter was revised up to a 3.7% annualized rate from the initial estimate of 2.3%. A significant increase from business investment and inventory builds contributed to the big bounce from the weak Q1 expansion. It was enough to cause oil prices to spike 10% on Thursday carrying the related equity sector up strongly with it. Meanwhile eyes turn to the Jackson Hole, Wyoming meeting of global central bankers. Absent this year are the heads of the Federal Reserve and European Central Bank, so the speaker of focus is the Fed Vice Chairman Stanley Fischer on Saturday. The topic is on inflation and what insight into the Fed’s thinking on timing he may offer. Officially, the Fed has a dual mandate – price stability (inflation) and full employment. Unofficially, you could also argue that the Fed has undertaken may include systemic risk as well so it leaves to question how much of the recent turmoil factors into their thinking. They repeat time and again that they are data-dependent. Well, the data gives them room to go either way. On Friday, their favored measure of core inflation (excluding food and energy) was up only 1.2% year-over-year, falling short of the 2% target. There is nothing that says that they will not raise rates while core inflation low; it has more to do with their confidence on understanding the reasons why and if they think it is temporary.
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