Yesterday was an ugly day. Equities declined for a myriad of reasons; including a report from Reuters that Russia may seize foreign assets in retaliation of sanctions, domestic economic data that questions the timing of a change in monetary policy and European economic weakness that raises fears of a more pronounced slow down on the continent.
I have written many times the indices typically decline 5% to 20% during a mid-election season because of uncertainty. In many respects, the decline has already occurred in the broader market for the “typical” NASDAQ stock is down over 20% YTD. Are the large capitalized issues finally capitulating, a scenario I first discussed on Monday?
If such a scenario is unfolding, what will happen after the election? Typically there is a rebound, a rebound led by laggards.
The rising value of the dollar is generating some attention. The Bloomberg Dollar Spot Index is heading for its biggest quarterly gain since the period ended September 30, 2011 and touched the highest level since June 2010. The rise in the greenback hypothetically ensures somewhat less inflation and in turn could cause the Fed to remain more accommodative.
The operative word is hypothetically for yesterday the odds of the first increase in the benchmark rate by July 2015 rose to 56% from 52% two weeks earlier.
On the opposite side, a rising value of the dollar negatively impacts profits of the large cap multinationals as their goods become more expensive abroad.
Will this fear positively impact the smaller capitalized issues, issues that have been pounded the last eight weeks? The Russell 2000 is down over 6.92% for the quarter and 5.45% for the month versus a 4.11% quarterly advance for the NASDAQ 100.
If the above correlations hold true in 2014, the Russell 2000 should rally within the next 4-6 weeks given the 11% difference in performance, a rally perhaps amplified by concerns the rising dollar will negatively impact the earnings of the NASDAQ 100.
What will happen today? Revised second quarter GDP is released, a revision that should not be much significance given this was activity from 3 to 6 months ago. Also released is the final reading for September’s University of Michigan’s confidence survey.
Last night the foreign markets were mixed. London was up 0.12%, Paris up 0.77% and Frankfurt up 0.17%. Japan was down 0.88% and Hang Sang down 0.38%.
The Dow should open little changed. The 10-year is up 1/32 to yield 2.49%.