State of the Stock Market Analysis for the Week Ending August 30th, 2015 (Dow Plunges and Recovers 08-30-2015)
By the looks of the flat and mixed close for stocks on Friday, most investors would have thought it was just one more of those lazy trading days of summer. The weekly numbers essentially said the same thing, and if you had been out backpacking or sailing with no news feed, it might have seemed like a fairly low-key week that saw the Dow up 1.1%, the Nasdaq up 2.6% and the S&P 500 up 0.9%. Just a big yawn, and then we get ready for September, right? It was quite a different week than that, though, but the bulls were pleased it ended with all three of the major indices up for the week.
Monday morning’s open saw the Dow plunge by nearly 1,100 points, and for a minute there, it looked as though a major market collapse was at hand. It felt a lot like the October 1987 crash, and it was difficult for many Wall Street professionals to make sense of it. Stocks did bottom and cut some of the losses for the day, but then Tuesday saw stocks fall sharply again. Wednesday and Thursday were big up days, and then yesterday’s flat and mixed close was a fitting end to a roller-coaster week, in which all three of the major indices were in the green.
It seems that China was the main culprit behind the downward plunge. Its Shanghai Index finished positive by about 5% on Friday, but it is still down by about 40% from its June high! There was talk that China’s 3% devaluation of the yuan was a “preemptive strike” against a possible Federal Reserve rate hike in September, and with all of the market turmoil right now, a Fed rate hike might not occur. The bounce we witnessed on Wednesday and Thursday alleviated a lot of the panic, and with stocks up for the week, there is even talk that the Fed might go ahead with a September rate hike after all.
The Fed’s Central Banker Conference in Jackson Hole, Wyoming is underway, and there are a host of speakers set for Saturday, so maybe we will get some clarity as to just what the Fed Heads are thinking right now. The second quarter GDP number we saw this week came in at an upwardly-revised 3.7% versus the expected 3.3%, which was a big plus for the economy. It was also up solidly from the initial 2.3% reading. So again, the argument is that the U.S. economy might be strong enough to merit a mere 25 basis point rate hike. The economy is probably strong enough, but the bigger question is whether financial markets are strong enough to handle a rate hike.
We all know that Alan Greenspan predicted a “taper tantrum” if and when the Fed hikes rates, and the last thing the Fed wants to do is create a replay of the past two weeks of global market free-fall. The Fed also does not want to be perceived as “hostage” to the market, and some Fed critics were saying this week that it was time to get rid of the “Greenspan Put.” The Greenspan put was the thought that markets could ALWAYS depend of the Fed to step in and “make things right” in market meltdowns by flooding markets with cash and launching stimulus programs, as Greenspan did during his tenure at the Federal Reserve.
The interesting parallel to the “Greenspan Put” actually is occurring in China right now, as its banks and politicians are cutting rates and promising “anything and everything” to pump up its beleaguered stock market. (Maybe Greenspan is a highly paid consultant right now to the Chinese.) China is the big “wild card” right now, and it is extremely unclear as to how that economic and market drama will play out. Keep in mind that China was a centrally-controlled, communist nation not too long ago, and once it figured out how to make and manufacture everything on the planet (go to your local Wal-Mart), they unleashed an unsurpassed economic boom.
China has moved beyond “making things,” and now it is dealing with domestic stock market crashes, interest rate cuts and stimulus programs. Welcome to modern capitalism, China, and global investors hope you know what you are doing. China is the second largest economy in the world now behind the U.S., and if China sneezes, the world likely gets a cold. That said, we did have a positive week for the U.S. stock market, and that sent the bulls into the weekend smiling. The Gorilla wishes each and all a wonderful and restful weekend, and we will be back in action on Monday. Again, have a great weekend!
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