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The Three Weeks Following Labor Day New Trends are Potentially Established Thus Resulting in Higher Volatility. Will 2015 Be the Inverse?

The volatility is incredible.  Typically the three weeks leading into Labor Day are quiet and uneventful.  The three weeks following Labor Day new trends are potentially established thus resulting in higher volatility.  Will 2015 be the inverse?

I think come January 1 there can be radical changes in the geopolitical and socio economic landscape.  What are the odds consensus regarding the 2016 election be greatly different?  What about oil and the Middle East? And the economy?

Bloomberg reports the Sunni nations’ banks have lending capacity of about $100 billion, which is incidentally is the amount the IMF is suggesting Saudi Arabia will need to borrow to meet its 2015 budget shortfall.  Several weeks ago I referenced a Bloomberg Newswire story stating loan growth for this banking group is almost 9% while deposit growth is only 3%.

What about domestic growth?  Will growth exceed expectations given the increase in bank lending, strong auto/home sales, and greater jobs growth, four areas which typically suggests an economic acceleration?

And then there is the political scene.  Will the Democratic front runner implode?  Who will emerge as the Republican front runner?  All must remember that Ross Perot was ahead of all candidates in June 1992.

Is the current volatility a manifestation of all of the above, perhaps suggesting tomorrow will be radically different than today?  Maybe.

Commenting about yesterday’s market activity, equities ended higher partially the result of the Beige Book indicating the economy expanded across most regions and industries in July and August and a tighter labor market boosted wages for some workers. 

Oil also advanced about 1% reversing an early morning decline of almost 6%.  Some would think the potential final approval of the Iranian deal would cause crude to fall.  Can I suggest several reasons why crude did rally? 

Maybe it is the case of sell on rumor and buy on fact as most thought the President could obtain a veto proof minority.  Maybe it is the case of potential greater Middle East instability given many are now openly declaring a new Middle East arms war could be at hand.

Or maybe it is from the acknowledgment of a potentially liquidity squeeze for many OPEC countries given the demand for funds.

Or perhaps the reversal is a simple acknowledgement of greater potential growth in the US than previously expected.

In any case, oil is the most volatile in over 25 years, trade dictated by momentum and technical trading.

What will happen today?  The ISM Non Manufacturing data is posted, a data point designed to measure activity in the service sector of the economy, a sector that represents about 70% of economic activity.

Last night the foreign markets were up.  London was up 1.34%, Paris up 1.02% and Frankfurt up 1.41%.  Japan was up 0.48% and Hang Sang down 1.18%.

The Dow should open quietly higher as manufacturing and service data in Europe increased at the highest level since May 2011.  The 10—year is unchanged at 2.18%.

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.