There are a lot of worries when it comes to the world and the markets right now. The Middle East uncertainty along with inflation scares, covid, and now Hurricane Ida, are among several of the main topics. The hurricane has caused oil firms to slash output by 91% in the gulf, so we are watching oil prices carefully. We’re seeing mixed economic reports but it’s important for us to stay focused on the biggest factors of what’s helping the market continuously grind higher. It’s important to remember that the Federal Reserve is still accommodative, and corporations are still seeing strong earnings growth. You can see this in the chart shown in the video. US Corporate profits are still seeing highs as core capital orders and shipments hit new highs. If you’re talking with friends or colleagues about the concerns of the world, show them this chart because it shows that Corporate America is very healthy right now. We saw second-quarter GDP revised higher and we’re seeing third-quarter GDP tracking around 5.7%, which is solid growth. Again, it’s important to stay focused on two of the primary drivers of the market and, as of today, they’re both tailwinds for the market.
The biggest fear that the market has, is that the accommodated Fed will reduce their accommodations too soon before the normal economy, which is corporate earnings, catches up. What we heard out of the Federal Reserve chairman on Friday in the virtual Jackson hole Summit, was that this is a long way away. He was very clear about separating a reduction in purchases of assets from higher rates, so it doesn’t just go from one to record to the other. This gives the Fed a lot of decision-making and time to decide if the economy has got to the point where it can stand on its own two feet without Fed tapering and supporting a lot of the markets. The earnings growth is very important as the Fed reduces bond-buying and potentially increases rates. That is a multi-year process now. Let’s go back to 2013 which is the last time the Fed reduced bond buying. They were buying, at that point, $85 billion a month in treasuries and mortgages. Right now, the Fed is buying $120 billion a month. The tapering in 2013 took just under a year. We’re looking at 2023 before the Fed is done buying new assets. Beyond that, the Fed has time to decide whether or not they raise rates. Previously, it took the Fed two years to go from stopping buying bonds to increasing interest rates and that’s going from easy policy to hard policy. What that means is that the Fed is saying we want to reduce economic growth. Right now, they are still stimulating and trying to push economic growth forward with $120 billion dollars purchases a month continuing at least to the end of the year. What will cause that to speed up or extend will be the data. The Fed is looking closely at Corporate America and the jobs market. Since the crisis of 2020, we have talked about the Fed and how they have been and continue to be focused on jobs. We get data points on jobs each month and the one for August will come out on Friday. The last two months have been phenomenal showing over a million new jobs created in the last two months each. This month is looking to being around half a million. It’ll be a very big data point to see how we’re doing in terms of job creation going forward. I think the Fed has received a lot of push to be less accommodative because of the phenomenal two months we’ve seen on jobs. If that doesn’t hold up, we may see a longer timeline on Fed accommodation, which at the end of the day is very positive for markets. Traditionally, the Fed is looking very closely at inflation and jobs. What we’ve seen is that they let the inflation “tail wag the overall policy dog” and then when they see a little bit of inflation, they raise rates too soon before jobs recover. This Fed has been clear that they are looking at jobs and think the individual is the most important part of the economy. They have been very clear with that so that’s why we’re so hyper-focused on the jobs data. While the Fed may say they’re going to potentially taper at the end of the year, they’re still buying the bonds. That supply and demand and short-run push prices higher. If you have $120 billion a month coming into the financial markets, that is a huge demand driver and likely will keep prices elevated.
We saw a large boost at the end of the last week with the S&P 500 closing at a price of 4,509. We now have a new resistance level of 4,530 and a new support level of 4,480. We want to talk about this because about a month ago we talked about the end of the year resistance level possibly being around 4,500. That’s important to keep in mind when we discuss these market prices each week. We typically give a short-term analysis when we do our reports. To determine whether the market is showing a bullish pattern or not, it would need to consistently be priced around 4,500 or above. Therefore, it’s important to look at the technical analysis and correlate it with fundamental analysis to prove that point.
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