Overshadowed by concern about Syria, markets will be hyper-focused in the week ahead on Friday’s August jobs report, data that could shape the Federal Reserve‘s decision on its bond-buying program and determine the path for interest rates and mortgage rates this fall.
September is historically the worst month of the year for stocks, and this year is particularly challenged by a series of major events that markets will have to navigate. Besides an expected U.S. military response to Syria’s use of chemical weapons and the jobs report, markets are focused on the Fed’s Sept. 18 meeting; uncertainty about the next Fed chairman, and the debt ceiling debate in Congress.
“Maybe we’re getting some of September out of the way in August,” said Bob Doll, Nuveen Asset Management chief equity strategist and senior portfolio manager. The Dow was down 4.5 percent for the month of August, ending Friday at 14,810, and the S&P 500 was 3.1 percent lower at 1632, and the Nasdaq was the outperformer, down just one percent at 3589.
“I’ve been calling for a 1550 to 1700 trading range (on the S&P), and I’m still of that view that that’s going to continue,” said Doll. “I think we’re in this sideways chopping, consolidating, boring period for a while.”
Doll said Syria, the lack of clarity on the Fed’s plans for tapering back its $85 billion bond purchase program, and uncertainty over whether former Treasury Secretary Larry Summers or Fed Vice Chair Janet Yellen will replace Fed Chairman Ben Bernanke in January are among the issues weighing on markets.
“It’s the collection of these uncertainties and the absence of revenues and earnings that puts us in this funk,” Doll said, adding selling could continue in September. “But I don’t see big downside.”
Angst about Syria
Traders are expecting the U.S. to go it alone against Syria with a limited, strategic missile strike, after the British Parliament voted Thursday against getting involved. While traders are clearly nervous, analysts say the market reaction could be relatively muted if the strike is swift and does not trigger a response.
Deutsche Bank’s Alan Ruskin said there should be an initial bid in the dollar if there is an assault by the U.S. “There is a bit of uncertainty. You might get some minor flight to quality that doesn’t last very long,” said Ruskin, head of G10 foreign exchange strategy. But markets would have a much more serious, longer term reaction if other countries become involved, such as Syrian-ally, Iran, or if there is an attack on Israel.
Stocks, trading hesitantly into the long Labor Day weekend, could initially sell off on a U.S. military strike, then rebound. “As usual, I think the market will rally,” said Doll. “Markets usually go down on rumors of war and usually go up when wars start, and the reason is when a war is rumored, there’s all kinds of uncertainty.”
Geopolitics will stay in the forefront as President Obama heads to the G20 in Russia, a country whose leadership has been outspoken against U.S. intervention on Syria. The G20 gathers Thursday, and the president is expected to leave Washington Tuesday, which stirred some speculation in markets that a military strike could come against Syria as soon as this weekend.
Nervousness about Syria showed up in Friday’s trading, and the Dow finished lower by 30 points ahead of the three-day weekend. As Secretary of State John Kerry spoke Friday, laying out the case against the Syrian government and the U.S. response, stocks moved to their lows of the day and then erased those losses while he was speaking.
“Starting off the speech, it was clear he was making a case for going forward with some sort of military campaign, and toward the end you understood it was something that’s going to be done remotely with a shot across the bow effect rather than something lengthy with troops involved. If it’s brief, I think that is good for the markets, but time will tell once something does begin, what the response will be then,” said Mark Luschini, chief investment strategist at Janney Montgomery.
Oil has so far been the most volatile market when it comes to Syria. West Texas Intermediate crude finished Friday at $107.65 per barrel, after hitting a two-year high of $112.24 per barrel Wednesday. Electronic trading in U.S. energy futures resumes Sunday at 6 p.m. ET and continues until Monday at 1:15 p.m.
If there’s an attack, “It’s going to spike at first, but if it’s a strategic strike it should come off as fast as it goes up,” said John Kilduff of Again Capital. “The fear in the oil market is it spills into Israel, or it gets the Saudis, Iranians involved. But it seems like if it’s a smaller counterpunch that should not happen.”
Kilduff said oil came off its highs when the market began to sense that a strike would be more limited, and perhaps lower the chances of retaliation. “It’s the retaliation that’s the worry,” he said.
Treasurys could see initial buying, driving rates lower if there is a quick U.S. attack that ends after a couple of days. But the focus would quickly shift back to the jobs number, and any data that would provide clues into the Fed’s decision-making process.
Syria is “going to keep our market on tenterhooks and perhaps be a bullish event” with yields moving lower, said David Ader, chief Treasury strategist at CRT Capital. But then investors “are going to care about the employment number and they’re going to care about the run up into the Fed meeting, and I think both of those will prove not to be great, shocking sort of things, and I think we’re very quickly going to move to the debt-ceiling debate.”
The Fed is expected by many economists to announce plans to reduce bond purchases, or quantitative easing, if Friday’s jobs number is strong or mostly in line number with expectations.
Economists expect to see 180,000 nonfarm payrolls were added in August, and the unemployment rate unchanged at 7.4 percent, according to Reuters Thompson. There were 162,000 jobs added in July.
“If the number disappoints then the guessing game will remain alive and well until the Fed meets in the middle of the month,” Luschini said.
David Ader, chief Treasury strategist at CRT Capital, said he expects the Fed to decide to taper at its September meeting — no matter what.
“I don’t think the unemployment number is going to matter. I don’t think it’s going to change what the Fed is going to do. I think tapering is going to be done,” he said.
Of course, traders will immediately begin to speculate on the magnitude of the Fed’s gradual tapering as soon as the number is reported. Estimates for the first round of tapering range from about $10 billion to $25 billion.
Besides the jobs number, there is a large amount of data that traders will be watching both with the Fed in mind and to see how the economy is faring this quarter. The third quarter seems to be lagging the second quarter’s 2.5-percent growth rate, even though many economists had been expecting it to be stronger.
ISM manufacturing data is reported Tuesday, auto sales are Wednesday, and ADP private sector payroll data is Thursday. There are also Fed speakers next week, including San Francisco Fed President John Williams Tuesday, and hawkish dissenter Kansas City Fed President Esther George speaks on Friday.