Dollars and Sense: Markets remain cautious but not as volatile

Fears abated. Last week, I said the markets would calm down a bit from the extreme volatility of the week before, and they did—but not a lot. We did see a couple of big swings last week, but a semblance of calm has returned to the markets. The Volatility Index (VIX), sometimes called the “fear index,” is a complicated calculation used to value the insurance that sophisticated traders buy to hedge their trades against downside risk. The VIX spiked two weeks ago, but last week returned close to historic norms. We also saw trading volume, which had spiked, also move closer to normal. It’s also important to note that the Dow is still above 16,000. Yeah, that’s down from 18,000, which is where it was a few months ago, but this hasn’t been a crash. It’s been a long overdue and much anticipated correction.

A rate hike? For months market watchers have said the Federal Reserve Bank will raise interest rates in September. Lots of analysts are now asking if the recent gyrations will affect that anticipated hike. Last weekend at the Fed’s annual gathering in Jackson Hole, Wyo., Fed vice chairman Stanley Fischer said policymakers still had a “pretty strong case” for raising rates in September. But he emphasized he was not saying what action the Fed might take at its meeting next week. Analysts took his comments to mean he still sees the economy moving in a positive direction, despite market gyrations.

What will happen when rate hike comes? When rates go up, usually the market goes down—for a variety of technical and psychological reasons. But that may not be the case this time. The recent correction has some of that decline “baked in” to the markets. Also, a clear statement and definitive action from the Fed regarding rates will take some of the current uncertainty out of the markets. And it is that uncertainty that is at least partly to blame for the volatility.

Can’t explain August away. There’s no denying that August was a rough month, the worst month for the Dow since May 2010. But, historically, September is the worst month of the year when measured by Dow performance. August brought us the stock market’s first 10 percent correction in four years. And it wasn’t just here in the United States. Manufacturing in China hit a three-year low last month. In fact, for the past few years we’ve been saying that the problem in China is that it isn’t growing as fast as it was. But now it looks like manufacturing in China is on the verge of contraction, of actually shrinking.

Employment steady. It might help matters this week that Friday’s employment report was actually pretty good. Unemployment fell to 5.1 percent. For the past few years, a lot of critics have said, “Yeah, but that just means people have stopped looking for work.” There has been some truth to that. So-called “discouraged workers” had been high, but that number fell last month, and the labor participation rate, though low at 62.6 percent, is unchanged for the past three months, so there’s some evidence it’s bottomed out. Wages are ticking up slightly. A separate report says worker productivity is also up significantly, a sign the labor market is tightening. The only real bad news in the report was the number of new jobs created, which was about 173,000 for the month, which was well short of expectations.

The week ahead. It’s Labor Day today, and the markets are, of course, closed, so it will be a quiet week for economic reports. I also think a lot of traders will be hanging back, afraid to act too aggressively in advance of the Federal Reserve meeting on Sept. 16 and 17. I think you’d have to say now that whether the Fed raises interest rates or not is truly a coin toss. It could go either way.