You’d never guess it by the way most investors have been carrying themselves, but the stock market is in a battle for all-time highs — and that battle is about to get awfully interesting this week.
The Standard & Poor’s 500 index’s chart is simply pockmarked this year. Stocks suffered an early-year crash, as well as a turbulent first-quarter earnings season, especially for retail. The S&P 500 also ate a 1 percent dip across Thursday and Friday of last week after coming within about 10 points of all-time highs.
And yet, here we are, actually up 2.5 percent for the year, and still less than 2 percent away from the indices’ high-water mark of 2,130.82 set in May 2015.
Here are three macro factors that will be front and center this week and help determine whether the S&P 500’s run falters or breaks records.
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The Federal Reserve. The Federal Reserve’s Federal Open Market Committee meeting is on the books for Tuesday and Wednesday, and for months, the scheduled Day 2 policy announcement has been inked in red Sharpie on the calendar, with many expecting that’s when we would hear that interest rates would be ticking higher once more.
That is, of course, until the May jobs report.
Anemic nonfarm payroll growth of just 38,000 jobs, as well as a pair of downward revisions for March and April, forced Fed Chair Janet Yellen to wave the “don’t panic” towel a few days later, saying short-term interest rates would be staying put for now.
So if we already know what’s coming, why does the Fed’s announcement matter? After all, markets already reacted with jumps both after the job report itself and Yellen’s response.
Well, the rub will be in the details.
“How will the Fed explain only 38,000 jobs being created last month?” said Bryce Doty, portfolio manager of the Sit Rising Rate exchange-traded fund (ticker: RISE) and senior fixed income manager at Sit Investment Associates. “They will either decide it reflects a significant weakening of the economy or, by default, need to assume it is due to a lack of workers to meet demand. The latter being a concept so foreign to Americans, it will be difficult to see how the markets will react.”
Doty also points out that the Fed’s thoughts on inflation will be telling, pointing out that almost all major core inflation measures have ticked above the Fed’s 2 percent target year-over-year, and the core personal consumption expenditures price index has slowly risen by 1.6 percent from last year.
“Consequently, opinions vary widely on both of these issues,” he says, “so no matter what the Fed communicates, some investors will be surprised, which will cause more market volatility.”
The “Brexit.” On June 23, the U.K. faces a referendum that represents one of the biggest decisions its people have had to make in decades. And while the vote is still a week away, investors can expect markets to be extra-sensitive as speculation flies over the increasingly looming date for this large question mark.
The vote will decide whether Britain will remain in the European Union, which it has belonged to since 1973, when it was the European Economic Community, or if it will become the first country to exit the 28-member bloc.
Opponents to a so-called Brexit say that ditching the EU will hurt the U.K.’s economy all around, from the loss of jobs and beneficial trade deals to downward pressure on the pound and British real estate. Supporters say other trade arrangements could be made, and they also like the prospects of the U.K. having greater control over immigration policy.
“Let’s be clear, this is not a vote on economics, though it is packaged that way. This is a vote about fear and control,” says Jonathan Citrin, a Detroit-based financial adviser, speaker and author on mindfulness and finance.
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“The important thing to remember when assessing the truth of Brexit is that Britain will be a player on the global economic scene with or without membership in the Union,” he says. “While it does have near-term implications toward how businesses do business, the Brexit is truly about how tight to hold the reins.”
Why does it matter to Wall Street?
For one, we’re talking about a host of economic unknowns for the fifth-largest economy in the world, which alone would be enough to send volatility buzzing. A CNN report on various Brexit scenarios seen by the U.K. Treasury include GDP hemorrhaging up to 7.5 percent in 15 years, and 820,000 jobs lost. So a vote to leave the EU is very likely to bring out investors’ inner bear.
Charles Sizemore, a portfolio manager on Covestor and chief investment officer at Sizemore Capital Management, a registered investment advisor in Dallas, sees a few immediate effects.
“Investors will sell first and ask questions later, especially across the European markets,” he says. “Also, doubt in European currencies should send investors running toward the U.S. dollar, as well as U.S. and German bonds, which will send yields into the ground, probably to all-time lows.”
Obviously, the biggest market impact will come on the heels of the vote, but the lead-up will undoubtedly cloud investors’ thoughts as the deadline nears, especially amid a very thin lineup for U.S. company earnings.
Economic data. Starting Tuesday, Wall Street will see a minefield of important economic data releases — and again, given the fact that corporate earnings will be a whisper this week, investors could be a little more sensitive to them than normal.
The retail sales report on Tuesday could be an especially touchy point. After a first-quarter earnings season that saw the likes of Macy’s (M) and Nordstrom (JWN) get pounded for weak results, the market is looking for signs of a turnaround on this front. We found out in May that April’s retail sales were promisingly higher (though department store sales were still lousy); if we get another month of positive numbers, investors’ confidence could recover a bit more.
And while a June rate hike seems out of the cards, the consumer price index report on Thursday could have a lot to say about the potential for higher rates in late July, which is when the FOMC meets next.
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Housing data out this Friday, meanwhile, could determine whether last week’s dip in homebuilders is a firmer end to what has been a strong month-long rally, or just a blip.
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3 Things Investors Must Watch This Week originally appeared on usnews.com
