It's the one-week anniversary of the 1,089 Dow plunge. Time sure does fly.
Since that epic day, everything has come into place for stocks to continue to stabilize and perhaps tick higher.
Consider the Fed's William Dudley's dovish comments in the middle of last week. What he effectively said was this week's August jobs report, while important in the Fed's decision-making process, may be looked past by the Fed. Instead, more weight will be placed on the September employment report, which could showcase weaker employment growth thanks to August's stock market nosedive, weak China data and strong dollar.
The Fed's Stanley Fischer's comments over the weekend at Jackson Hole were a mixed bag. If anything, they seemed to counterbalance the dovish musings of Dudley because, hey, the Fed doesn't want to be seen as driving stock prices directly. I think Fischer's comments should generally be pushed aside. He was in a tough spot this weekend and couldn't necessarily express much on Fed policy. The high ground had to be taken and he gladly took it.
Investment banks have been issuing notes testing the odds of a U.S. recession because of China's slowdown and stock market upheaval. All in all, these assessments (with all sorts of worst-case scenarios built in) have forecasted the odds of a U.S. recession in 2016 at less than 30%. I think this is important to slowly help rebuild investor confidence, which once again was severely damaged. Recession fears had been rising for most of August, and I think talk of one in 2016 added fuel to the fire on last Monday's market rout. You would be surprised how rumors and speculation spread from the right parties do wonders to destroy (or prop up) stock prices.
Warren Buffett put money to work in Phillips 66 (PSX) with heavy exposure to oil. Shares of Phillips 66 are off about 13% from their Sept. 2014 high. Buffett lurking in the beat-up oil patch may help to soothe investor sentiment a bit. That is until we receive a bunch of ugly China macro data in the late-night hours.
I think we have learned a great deal within the past week about ourselves as investors and the financial system. Investing is a 24/7 learning process. Either respect the process or capitulate. But one particular thing we have learned is that rates are going nowhere anytime soon. They will either stay at rock-bottom levels for the balance of 2015 or they will be lifted one time by 25 basis points at a meeting before the year is over. In this environment, I think you have to favor diversified companies with attractive dividend yields. People will be on the hunt for yield. Any company selected should have limited exposure to China and oil.
From Around Wall Street
I read a ton of macro notes to stay up to date on the mood on the Street. Here are some bigger themes to ponder this week.
Post-market rout, are companies aggressively putting money to work?
According to Deutsche Bank, S&P non-financials have $1.5 trillion in cash or equivalents, mostly offshore. In the aggregate, notes Deutsche Bank, the S&P has been spending more than 100% of its domestic free cash flow on dividends and buybacks. If we get some market surges in the front half of the week, following through on momentum from late last week, it could be a sign of aggressive corporate buying. That would be a very good sign smack in the middle of the third quarter and market hysteria. Another positive sign would be companies announcing foreign-based acquisitions of companies with heavy emerging-market exposure.
What About Gas Savings?
Very minimal signs that this was actually happening in the second quarter. Target (TGT) had a stellar quarter in apparel, which likely was aided by gas savings. American Eagle Outfitters (AEO) had a mind-blowing same-store sales gain of 11% before back to school, indicating gas savings are buying some t-shirts and $30 jeans. Dollar Tree's (DLTR) earnings this week will be a nice tell if low-income Americans are spending at a healthier clip.
According to Morgan Stanley, if the current path of oil prices is sustained, gasoline prices at the pump will soon average less than $2.00 a gallon. That would be the lowest national average retail gasoline price since March 2009 and would represent a savings to U.S. households of roughly $80 billion annualized compared with mid-June prices. That money has to find its way to pressured clothing prices in September. If not that would be a huge red flag on how the stock market's volatility is weighing on household sentiment.