The market has traded in a historically tight range over the past six weeks, as illustrated in the charts below. S&P 500 prices remained between 2170 and 2180 across nearly every trading day during those six weeks. Volatility is likely to normalize following Friday’s August employment report and the Labor Day weekend.
The Nasdaq had a wider trading range, though it also flattened after the first week of August. The Russell 2000 Index has climbed steadily over the past six weeks to lead index performance.
Several Fed officials have contradicted Federal Reserve Chair Janet Yellen’s arguably dovish speech at Jackson Hole. While Yellen focused on general central bank strategy, discussing the possibility of lowering long-term interest rates and unconventional ways of easing monetary policy with short-term rates near zero, Fed Vice Chair Fischer sounded a more hawkish tone, citing near-maximum employment and its impact on the data that determines rate hike policies. San Francisco Federal Reserve Bank President John Williams has also publicly stated support for a September rate increase. While odds have lifted in response to recent comments, most analysts are not currently anticipating a hike until at least December.
The market is pulling interest rates higher regardless of Fed policy. The 10-year treasury yield spiked above 1.6 percent on Friday, breaking out of its recent trading range between 1.5 percent and 1.6 percent. Interest rates pulled back on Monday, but the move higher indicates market sentiment.
Utilities slumped more than 2 percent and financials rallied more than 2 percent over the past week as investors adjusted interest rate expectations.
Among subsectors, regional banks benefited most from higher interest rates, while pharmaceuticals and biotechnology fell with Mylan’s (MYL) EpiPen scandal. Commodity-related stocks were generally lower, though coal miners bucked the trend.
A better-than-expected retail earnings season was interrupted by last week’s disappointing dollar store reports. The companies cited higher rents and higher healthcare costs for squeezing their lower-income customer base.
New home sales were strong last week, though existing home sales stalled with the possibility of higher interest rates. iShares US Home Construction (ITB) is on the cusp of a new all-time high.
First Trust USE Global Wind Energy (FAN) has surprisingly rebounded since bottoming in February due to hefty European exposure. Spanish firms comprise 23 percent of assets, followed by 13 percent in Danish and German companies, accounting for a total European exposure of about 63 percent of assets. Guggenheim Solar (TAN) shares, however, are still down about 30 percent from their 2016 high.
Commodities continued to exhibit weakness last week. SLX and COPX are both correcting, while copper prices sank back towards the post-2008 low. KOL rebounded slightly over the past week.
A stronger U.S. dollar and weaker Chinese yuan have challenged commodities in recent weeks.
Oil prices declined last week despite a drop in inventory. The stronger U.S. dollar and the end of a short-squeeze further impacted the energy market. The chart below depicts 2016’s elevated inventory in 2016 relative to 2015 highs.
Gold mining shares finally experienced a meaningful correction. Shares of GDX are down nearly 20 percent from their 2016 high. There is some support around $25 for GDX. If this level is breached the correction could carry the fund to $20 a share.
iShares MSCI Emerging Markets (EEM)
Emerging market shares followed commodities lower for another week.
However, WisdomTree India Earnings (EPI) pushed to a new 52-week high, continuing the trend we reported last week. India passed legislation on Wednesday making it easier for foreign investors to obtain residency. Foreigners who invest at least $1.5 million can obtain a 10-year residency permit and maintain it as long as they employ 20 resident Indians each year.