Since the release of the February labor market report, which was much stronger than the street expected, stocks have been on a wild ride. Triple digits gains and losses have occurred this past week with the Dow Jones Industrial Average (chart) In addition, the S&P 500 (chart), the Nasdaq (chart) and the small-cap Russell 2000 (chart) have all pulled back noticeably since the February jobs report was issued. So wait a minute, a strong labor market is good for the economy, hence, good for stocks too right? Logically speaking yes, but as it pertains to the Federal Reserve, a stronger labor market and a stronger economy gives them the green light to begin to raise interest rates.
This is what is now permeating through the stock market. The concern is that the Federal Reserve has enough data to begin to change their stance on their multi-year accommodative financial policies, policies that have benefited equities since 2009. We may not have to wait too much longer to gauge the Fed’s stance as it prepares for next week’s Federal Open Market Committee meeting. I think the anxiety we are witnessing may be a little exaggerated. It’s normal to have emotions play out and even take control over investors, however, people seem to forget that the Fed has been extremely cautious as to even eking out the wrong language in their official policy statements. I would not expect the Fed to shock the markets by raising rates too early or too aggressively. That said, I do expect volatility to continue and for markets to get “emotionally” charged. We could very well be in the midst of yet another dip back to the 200-day moving averages of the aforementioned key indices and should that occur, I would expect that buyers would come in bargain hunting. Over the past few years, the 200-day moving average has acted as significant support for these key indexes. The only difference and question now would be, is if the Federal Reserve indeed changes their position on interest rates, how well would this favorite technical indicator fare? Good luck to all and have a great week 🙂
~George