This week is gonna be a long one, to paraphrase a line from an Eagles tune. I expect the market will see it this way, as well.  

  • The price of oil hovered above $97 a barrel Monday as investors prepared for key U.S. economic reports and a Federal Reserve policy meeting this week.

Which reminds me, I noticed the price of gas in my neighborhood had dropped some 35 cents per gallon in the last few weeks. Mind you, I live in one of the highest cost-of-living places in the US, so when gas drops from $4.03 per gallon to $3.68 per gallon, I notice. The more important point, though, is what the price of gas dropping means to the market, as we head into the biggest shopping time of the year.

Recently, the economic data coming out has shown that the government debacle hurt the US economy. Both consumer and business confidence dropped when the threat of a shutdown began emerging in August. That simple reality has led a number of economic markers to drop as well, as business investment and consumer spending took a break.

The price of gasoline going lower will help with the consumer confidence aspect, and that will lead to a rise in both business and consumer spending, which will lead to an upward tick in economic momentum. All things being equal, this is how it should go.  

Yet, things are not always equal and sometimes the market acts out. Sometimes, the market acts out because of irrational fear and, sometimes, it acts out because of the numbers.   

  • The guys over at Bespoke Investment Group (they have some of the best data nuggets) crunched the numbers, and are reporting we’ve now completed 518 trading days without a correction of 10%. The two questions are, why has this been able to happen, and when might the streak end?

Numbers are everything to the market. The market loves its numbers. The problem is the numbers come in two distinct varieties (technical and fundamental) and when one set is not giving the market what it wants, the other set can take over. This is what makes the above questions interesting. Will the market correct simply because it has not done so for some 518 days, or will the market keep on looking toward the fundamentals for direction?

  • The answer to the first question is, because we’re in a low-growth environment where monster-sized rallies are equally rare, negating the need for a big pullback. The answer to the second question is, not until the Fed actually acts on its taper threat.

I find the answers as interesting as the questions. The idea that our low-growth economic environment keeps the market stable, more or less, is intriguing in that the low-growth environment of the last four years or so has produced a market that is currently at record levels. As far as the market is concerned, does this mean low growth is preferable to something bigger?

This brings me to the answer to the second question. Is it true the market will correct 10% or more when the Fed actually does begin to taper? As I said earlier, the market loves its numbers and one big one that seems to hold sway at the moment is $85 billion per month. That is the number the Fed is currently pumping into the system to keep interests rates low and liquidity flowing.

One can ask if the US economy could stand on its own without the monthly injection, but that is not the point of the answer to the question. The point of the answer is to suggest the market will see the tapering of that number as a reason to correct, and I do not disagree.

The market as a matter of course corrects itself from time to time. It has to because the market cannot go up indefinitely. Folks become fearful when the market rises higher than its balanced level, and rightfully so. At that point, a reason, almost any reason, emerges to give the market its chance to rebalance. Given the recent spate of less-than-stellar economic data and the constant worry about when the Fed will begin to lessen its monthly injection, that correction is waiting in the wing. The question is, as was stated above, when.

I don’t know the answer, but what I do know is that when the market is in a low-growth economic environment, as it has been now for some four-plus years, it tends to be stable, as it has relatively been for the same length of time. What I also know is that one cause of the short-term burst of instability seen in the market over the last four or so years is the fractious nature of the US Congress. The recent political debacle exemplifies that and, as well, it suggests something the above two questions do not address – the market will remain stable as long as the economy remains stable.

Even though the knuckleheads in Washington damaged both consumer and business confidence in the short term, they did not damage the ability of either to lose the fear and return to a slow but steady increase in spending over the long term. This is the key, no matter what the Fed does.

So, is a correction coming? The answer is yes. Will it come when the Fed announces it will definitively begin withdrawing its support? More than likely, but in the meantime, if the fourth quarter of this year turns out better than the prognosticators are currently suggesting, look for the market to go even higher, all things being equal that is.    

Trade in the day; Invest in your life …

Trader Ed