Stock market whipsaws amid Fed uncertainty
Summer often brings, if not discontent, at least difficulty to stock investors. This one appears no different, as the whipsaw in the major indexes continued today.
Stocks rebounded early Wednesday morning after a drop in crude oil prices lessened inflation fears, with beaten-down sectors such as basic materials making the highest gains following yesterday's market swoon.
But while bargain hunters are nibbling again across the board, the uncertainty that sent them fleeing over much of the past three weeks remains in force. Stocks have tumbled worldwide with emerging markets taking the greatest drubbing and fast money, such as hedge funds, leading the charge lower.
The main cause has been a lack of transparency from the Federal Reserve over interest-rate policy.
"Unfortunately, the Fed has lost credibility," says Mary Ann Bartels, chief U.S. market analyst at Merrill Lynch. "Using the terms 'data dependent' and 'pause' has created uncertainty. Until the Fed gives the market clarity–so investors know how to behave – every market data point should add more volatility."
Investors looking for some of that clarity in the minutes from the last Federal Reserve interest-rate-setting meeting were disappointed. The minutes showed that Federal Reserve policymakers considered raising the federal funds rate–a key interest rate–by half a point at their May 10 meeting before choosing to raise it a quarter point instead. But they gave little insight into what they would do in the future, with the transcript noting: "Given the risks to growth and inflation, committee members were uncertain about how much, if any, further tightening would be needed."
Of course, the Fed isn't the only one to blame for the market's volatility. Investors have also wrung their hands over reports of declining consumer sentiment, a slowdown in housing, the possibility of a weakening economy, a seeming bubble in many commodities prices, and a few disappointing whispers from corporations such as Wal-Mart.
And then there is the wisdom of the seasons. Many investors know all too well the Wall Street mantra "Sell in May, and go away." This year they are also being battered by what might generally be known as the midterm-election investment cycle, something Jeff Kleintop, chief investment strategist of PNC Advisors, says the market is tracking.
"So far, this has been a textbook midterm-election-year cycle with a strong first quarter followed by a weak summer," he says, noting that this would usually lead to a rebound in the fourth quarter.
Kleintop adds that he expects this move upward after a summer full of data-dependent churning, with markets reacting to every blip on the radar as investors try to divine the direction of the economy and the Fed. (Of particular interest to investors this week will be the initial jobless claims report coming out tomorrow.)
Other strategists say stock markets may even rebound within a few weeks.
"Fast money has been driving this correction, generally meaning hedge funds," Bartels says. "That is why we feel the correction happened over such a short period of time and was so violent."
"Now our sense is that we are in a testing process. We believe this process will be successful, and the market should be able to rally and test previous highs in the market averages," she adds.
And if the market falls back after that? Barring any major technical breakdowns in the market, "any secondary correction we view as a buying opportunity," she says.
Others, of course, may disagree.