Stocks started the new week with a lighter than average trading volume day and a moderate sell off. The Dow lost 94-points making it four straight down days, highlighted on Friday after the stronger than expected jobs report. The TSP fund share prices below are from Friday October 7th since the TSP was closed on Monday, so Monday's market activity will show up combined into Tuesday's prices.
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In case anyone missed it, the September jobs report that was released on Friday came in stronger than expected and saw the unemployment rate go down to 3.5%, which is the last thing that the Federal Reserve wanted to see, and the stock market also didn't like it as we saw a major sell off on Friday, and that was followed by the semi-holiday action yesterday which made it four down days in a row for stocks.
The bond market was closed yesterday but the futures market was open and we saw those bond yields tick up some, sending the bond ETFs down, but again, we won't see any of that in the TSP fund until Tuesday's close.
This is certainly a vulnerable market as investors position themselves for Thursday's CPI report, and to maybe a lesser degree, tomorrow's PPI report. Those are the Consumer Price and Producer Price reports, and key reflections on the inflation situation.
There seem to be a few things that are understood by investors about what is going on right now. Inflation is a concern and the Fed is aggressively going after it, which creates another concern that the Fed's action will not only slow down economic growth, but trigger a recession within the next year. After the decent jobs report last week, it is interesting that the biggest problem right now is that the economy is not weakening fast enough.
If we compare this current market to the 2008 bear market there is one interesting difference. Back then, because the Fed was eagerly cutting interest rates to save the economy, rather than raising them to fight inflation, there has been no place to hide this year except cash.
In 2008 the G-fund returned 3.75%, but bonds (F-fund) got a 5.45% return because yields were dropping late in the year. Now it's the opposite and the F-fund is down 14.50% this year, so diversified accounts with a mix of stocks and bonds have been hit hard, and this is something rather new for most investors who expect bonds to be a safe haven when stocks decline.
At the end of October in 2008 the Fed cut the interest rate from 1.5% to 1.0%, and then in December they went right to 0%, so you can see how that reflected in the return of the F-fund that year. That likely won't be happening this year, unless we see the economy fall off the table between now and the end of the year causing the Fed to wave the white flag on interest rate hikes.
That chart also shows us that in 2008, not only was the typically bullish month of October down big, but so was November. And it was an ugly two months following September's losses. December did show some relief, but it reminded me that we probably can't count on the seasonality effect this year, and that's too bad because starting today there is a very strong stretch of 10 of 11 trading days being positive more than 50% of the time over the last 30 years.
Chart provided courtesy of www.sentimentrader.com
Earnings season is on the way so the volatility should remain relative high as the reports come in, but we won't get reports from the bigger market moving companies until the end of the month, although they could warn in advance keeping the market very vulnerable. By the end of October the market may be clamoring for some good news and we could see some big rallies if some reports happen to come in better than expected.
Trading volume should pick up today compared to yesterday's holiday-like action, but the market and investors may remain in tentative mode as they await the PPI and CPI report on Wednesday and Thursday respectively. Then, 3rd quarter earnings reports will start to coming in shortly afterward.
The S&P 500 (C-fund) was down on Monday after Friday's post jobs report melt down. It did get a little bounce off the lows yesterday after filling in the "stealth" gap between the close on Friday Sep. 30 and the low on Monday Oct. 3. Other mini double bottoms have not fared well since the August peak, but now that this decline is nearly two months old, we could be due for something more than a 2 - 4 day bounce. Crash concerns are heightened in this type of environment so that is part of the equation, but they are rare.
The S&P 500 (C-fund) weekly chart is looking over the precipice of some very solid support. Bounce or fail -- that's what we're all trying to figure out.
The DWCPF (S-fund / small caps) was down 1% yesterday after Friday's big loss but the June lows are still holding, so that's a plus, but that large blue head and shoulders pattern does not look too inviting for the bulls. We may need to see a breakdown to scare more people out before we see a rebound or, if the right shoulder is going to look more like the left shoulder, maybe we'll see a second test of the top of the right shoulder soon?
The EFA (I-fund) was down like everything else, and again the dollar seems to be calling the shots in stocks, and particularly here, so the future direction of EFA may be determined by whether the dollar makes new highs or if it sees a double top pullback.
The BND (bonds / F-fund) hit the prior lows and bounced a little so this is clearly a chart on the verge of either a major breakdown , or a bottom. It may depend on whether the yield on the 10-year Treasury stalls at 4% again, or if it breaks out to news high. If it can hold at 4% and pullback, this chart and the F-fund could see a nice bounce.
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Thanks so much for reading. We'll see you back here tomorrow.
Tom Crowley
Posted daily at www.tsptalk.com/comments.php
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