Wall Street Waiting Game: Investors Prepare For Troika of Events Thursday

It’s a waiting game today as the market’s attention centers on three big political and economic events looming on Thursday. There’s lots of buzz around the British election, a European Central Bank (ECB) meeting, and of course, the scheduled testimony of former FBI Director James Comey.

With this troika approaching, it’s important for investors to keep perspective. The Comey hearing definitely brings some anxiety because people remember how headlines about the director knocked the market off its game for one memorable day in May. And it’s important to monitor what he says, though the jury is out on whether he’s going to reveal anything that will really rock the market. On the other hand, keep in mind that the news networks have to broadcast 24 hours a day, and that creates a lot of noise. Investors might want to consider trading what’s actually there in front of them rather than the noise. Exercise caution, but be reasonable.

The ECB is widely expected to leave policy unchanged, but investors might want to listen for any hints in ECB President Mario Draghi’s comments about how an improving European economy might affect the ECB’s bond-buying program.

A slide into the close on Tuesday took the S&P 500 (SPX) down from the near the flat line where it had traded most of the day, leaving almost all red in its wake, and the trigger appeared to be tension about the Comey hearing. Only energy and materials gained, with the other nine sectors sinking ahead of headline events scheduled for Thursday. So there is some tension, but our definition of “tension” is somewhat diminished, partly because markets have been so docile this year. We had a 10-dollar move in a 2,400-dollar market.

For an example of a group that seems to be keeping things in perspective, check out the May Investor Movement Index^® (IMX), which tracks TD Ameritrade retail client activity. It rose to 6.13, up from 6.06 the previous month. Retail traders have been buyers for four months in a row. It’s interesting to see that retail traders apparently want to continue to be exposed to equities. There’s a lot of noise, but the retail trader has stayed away from the noise and is trading what’s there. 

Looking at the markets this morning, stock futures pointed to a slightly higher open after mixed trade in Europe and Asia. Crude oil fell again after a rally yesterday that might have been due in part to a weak dollar.

Defensive investments like gold, the Japanese yen, and bonds all climbed Tuesday, some to levels not seen in a while. Gold hit its highest intraday level since November at nearly $1,300 an ounce; the yen reached seven-week highs vs. the dollar, and 10-year bond yields fell to their lowest levels since last fall. Some of the defensive markers came off their peaks early Wednesday, as gold fell and bonds rose.

FIGURE 1: DEFENSE DEPARTMENT. Gold, plotted through Tuesday on the thinkorswim® platform from TD Ameritrade, leapt to its highest intraday levels since last November as concern built ahead of several major political events later this week. At the same time, the dollar tracked vs. the yen (blue line) fell to seven-week lows. Both the yen and gold are traditional safe haven investments. Data source: CME Group. For illustrative purposes only. Past performance does not guarantee future results.

Some Final Thoughts on May Jobs

Last Friday’s disappointing jobs number looked ugly, there’s no getting around it. Still, however one dices the data, the jobs trend remains upward, and some economists have said job growth only needs to average 100,000 or so a month to show the economy remains on track.  Also, keep in mind that seasonality can make the May report a difficult one to peg, partly because schools start closing for the summer and layoffs can be associated with that. Summer jobs and changing weather also sometimes make the May report a bit of an outlier. Investors might want to wait for the June report to see if that sorts things out after weak May job growth and downward revisions to the April and March data. Last year’s June report showed a big bump from May, though there’s no guarantee of a repeat.

Real Estate Puzzler

The real estate sector is typically pretty sensitive to interest rates, so it’s a bit puzzling to see it treading water despite the recent rally in the bond market. Even as 10-year bond yields fell from a high of 2.61% on March 10 down to 2.14% by late Tuesday, the real estate sector gained just 0.8% over the last three months. That compared to a better than 2.2% bump for the S&P 500 Index (SPX) over the same time period. Real estate’s failure to thrive in a low interest rate environment is a bit of a head scratcher, but might reflect weakness recent home construction and new home sales numbers. New home sales fell more than 11% in April. Also, the Fed tightened rates in March and most analysts expect another rate increase this month, so that might be playing into investor caution around real estate stocks.

Survey Says!

Historic results examined by research firm CFRA suggest that the rising number of all-time S&P 500 Index (SPX) highs so far this year, accompanied by low volatility, signal potential for more stock market gains ahead. Now having said that, past isn’t prologue. Additionally, the summer months are sometimes tough ones for the market, though the so-called “June swoon” is actually an exaggeration. The month historically has delivered essentially flat returns, CFRA said. Entering this week, the SPX had set 22 new all-time highs this year and the Dow Jones Industrial Average ($DJI) had set 17, but Nasdaq was way ahead with 37.