Dollars and Sense: Jittery investors look to Fed, housing data

Volatility and volume. It was another pretty wild week in the stock market. We’re having more days when the market swings 100 points or more. Of course, when the Dow is up around 15,000, a 100-point swing is not that much in terms in percentage. Still, it’s fair to say we’ve seeing more volatility in the markets in the past week or two. Volume has also been down a bit, and low volume can sometimes add to volatility. Still, for summer, the volume has been pretty strong. The old “sell in May and go away” tradition on Wall Street is a thing of the past.

Wag the dog. We’ll get to some of the week’s economic news, but it appears the Federal Reserve is still the tail that wags the dog when it comes to the stock markets. One example from this past week: Standard & Poor’s raised its credit outlook for the United States because of an improving economy and reductions in the federal deficit, and that should have boosted the markets. But uncertainty about when or if Ben Bernanke and the Federal Reserve might reduce stimulus efforts limited gains on Tuesday. Also related to the Fed policy is the fact that U.S. Treasury yields have been rising for a month, and so has volatility as investors rotate out of stocks and into other asset classes, including bonds.

Sales and jobs. That said, we did get some good economic news this week. The Census Bureau’s retail sales report Thursday showed a rise of 0.6 percent in May. Ken Perkins of Retail Metrics said that suggests we could avoid a retail “summer slump.” And the weekly report from the Labor Department was better than expected. The Labor Department reported that weekly initial jobless claims fell by 12,000 to a better than expected 334,000 last week. The four-week moving average has now fallen below 350,000, a number many analysts think signals consistent job gains. Stu Hoffman of PNC Financial said these good numbers are beginning to look like a trend.

But are they? There’s a saying on Wall Street: “The trend is your friend.” That means that traders and analysts tend to have a narrative in their minds about the market: “We’re in a bull market,” or “The summer will be flat,” or whatever. It takes more than the normal, daily ups-and-downs of the market to shake that narrative. That’s why trends in the market will continue sometimes long after the underlying narrative has turned out to be false. We’re in a phase when the Federal Reserve Bank is primarily responsible for keeping the trend alive. The so-far unanswered question is what will happen when the Fed stops buying $85-billion a month in bonds. We might learn that without the Fed’s push, this trend will grind to a halt.

The week ahead. We’re going to get a lot of housing data next week. The National Association of Homebuilders Housing Index for June will be released Monday. Housing starts and building permits for May come out on Tuesday. We’ll see the existing home sales report on Thursday. If these numbers go down, the markets will view that as a bad sign. However, because housing fell so sharply during the Great Recession, we’ve seen these numbers rise significantly in recent months—some would say too significantly, and there’s even been talk of a second housing bubble. So what the markets likely want to see is growth, but not too much. The increased volatility we’ve seen in the markets says we have more jittery investors, and they’ll be looking for any sign of either an unsustainable bubble, or of that bubble bursting, as an excuse to get out of the market.