Dollars and Sense: Waiting for the Fed

The new normal? The activity in the stock market seems to be returning to normal, though it is something of a new normal. A chart of the Dow Jones Industrial Average over the past few months shows a line gently sloping downward for several months, and then a big plunge in August. After that we saw a few days of peaks and valleys, and the straight line appears to be resuming—though at a level nearly 2,000 points lower.

Post-correction. So we’ve seen the correction everyone predicted. What happens now? The volatility has diminished, but many of the underlying causes remain. China’s problems, which precipitated this recent correction, haven’t disappeared. And the Federal Reserve is still contemplating an interest rate hike. A lot of analysts and investors will sit tight until the Fed meeting later this week. The employment picture, which is getting better but still isn’t great, will be a key factor in the Fed’s interest rate decision. The unemployment rate fell to 5.1 percent last month, but wages remain stagnant. And the labor participation rate remains at a nearly 40-year low. If the Fed raises interest rates, conventional wisdom says the markets will fall. But the recent correction may have baked that drop into stock prices, and some clear guidance from the Fed could be good for the markets.

The silver lining. The economic slowdown has had at least one silver lining. Gas prices have been falling even during the summer, peak driving season. In some places, gas prices are now below $2 per gallon. That’s put a few extra dollars in consumers’ pockets, and they seem to be spending those dollars. Consumer spending, as we reported last week, is up slightly. But oil prices continue to drop. Late last week, Goldman Sachs slashed its crude oil forecasts, citing oversupply and concerns about China’s economy. Goldman said crude oil could fall as low as $20 a barrel. That’s about half today’s price, and it wasn’t so long ago that crude prices were around $100 a barrel. So this is a huge disruption in the energy markets.

The week ahead. Even without the Fed meeting, we have a lot of reports to watch this week: retails sales, housing starts, building permits, and a whole lot more. China announced last week that its growth had slowed to 7.3 percent, a 20-year low. Such announcements are no longer surprises, but they do tend to drive the markets downward, especially in Europe, so we can’t ignore them. But, again, the eyes of the world are on the Fed, and on Thursday afternoon, that’s where my eyes will be, too.

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