The Trend

Two September Catalysts May Decide the Fate of Markets

You may have noticed that markets have become a bit more volatile than usual. Stocks aren’t moving as they should and that volume across the markets have been lower than usual. Fear has ticked higher for many traders, even as the major indices march to record highs.

There are two key catalysts that may be driving current market conditions:

For one, many of us may be in for a rude awakening September 20-21.  That’s when the Federal Reserve could move to hike interest rates.  In fact, according to the CME Group, futures are noting there’s an 82% chance of it happening. 

To the Fed, it doesn’t seem to matter that such a move could crash the markets two months prior to the U.S. elections.  It doesn’t even seem to matter that the economy is not prepared for higher rates.

For one, unemployment is not as strong as the Fed believes it to be.

Of the 155,000 jobs added in August (which missed estimates for 181,000), many of the jobs added were not quality, long lasting jobs.  Bars and restaurants, for example, added 34,000 jobs.  Leisure and hospitality added 29,000.  Retailers added 15,100.

When it comes to jobs, it’s about quality over quantity.

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But it’s not just the quality of jobs that’s troublesome. It’s also the lack of wage growth in the U.S.  Wages. Wage growth only grew 0.1% in August, down sharply from the 0.3% growth we saw in July 2016.  Even hourly earnings dropped sharply – pushing the annual growth rate to its slowest pace since 2014.

Inflation is still stuck at 1.6%, as well.  It’s well under the healthy target of 2%.

On top of that, GDP growth of 1.1% is nothing to write home about.  Neither is the latest Institute for Supply Management (ISM) Index for manufacturing activity.  In fact, it slipped to 49.4 from 52.6 in July.  Over the last 12 months, it’s barely been above 50.2 – which barely fell into expansion territory.

Second quarter productivity even slipped to -0.6% -- the biggest decline since 1979. 

We’re also beginning to see the initial signs of cracks in the auto loan bubble.

Already loan delinquencies are rising to frightening levels of 13% in July 2016 on a month-to-month basis.  Prime delinquencies are up 12% month over month, as well.  That could lead to a big crisis with major auto lenders already setting aside large amount of cash to cover potential losses.

Ford, for example, set aside $449 million, a 34% increase year over year.

Chart courtesy of Lightspeed Trader, by Lightspeed Trading

General Motors set aside $864 million for losses, a 14% year over year increase.

Chart courtesy of Lightspeed Trader, by Lightspeed Trading

That’s not progress that supports a rate hike at this time.  If the Fed hikes rates any way, it’s possible the market could crash in late September.

The other catalyst is oil.

OPEC and non-OPEC countries are set to meet on potentially cutting back on supply, given decreasing demand.  But there are signs that a supply cut may not happen.

One of the key components for a successful meeting is Iran’s attendance, but that’s not likely to happen either.  In fact, Iran just announced it’ll raise output levels over the next few months, shrugging off a recent agreement between the Saudis and Russians.

If there’s no chance of an agreement again, oil prices could pull back even more.

We’ll have to wait until the meeting September 26-28 to find out more.

Fortunately nothing is set in stone yet.  The Fed could be smart and not raise rates.  OPEC and non-OPEC could help firm oil prices a bit more.

Unfortunately for investors, we must prep for the absolute worst by setting up trailing stop losses and stop losses in case of a rude awakening.

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