These Downbeat Fed Speeches Subdued Stocks

Stocks slipped further into the red on Monday following a trio of downbeat speeches from Federal Reserve officials.

Monday turned out to be a bad day for stocks, as a disappointing Flash U.S. Manufacturing PMI report from Markit Economics was followed by downbeat speeches from three Federal Reserve Officials. Although the Markit Flash U.S. Manufacturing PMI for September continued to show expansion, it declined to 52.8 from August’s final reading of 53.1. A result above 50 indicates expansion. Economists were expecting an increase to 54.0.

The financial sector had a tough day after three Federal Reserve officials gave speeches that drove home the point that the taper did not begin this month because the economy is still in bad shape. New York Federal Reserve President (and FOMC member) William Dudley spoke at the Fordham Wall Street Council and delivered a message based on the following theme:

“In my view, the economy is slowly healing. But, while significant progress has been made since the end of the recession, there remain a number of headwinds that have offset the improvement in the underlying fundamentals. As a result, we have yet to see any meaningful pickup in the economy’s forward momentum.”

Atlanta Federal Reserve President Dennis Lockhart (who is not an FOMC member) delivered a speech entitled “Is the U.S. Economy Losing Its Dynamism?” Here is his answer:

“The question I posed at the outset was whether the economic dynamism of the United States is declining. Is America losing its economic mojo? There is some evidence to the affirmative. I believe some of what we observe can be explained by the recent recession and frustratingly slow recovery.”

Dallas Federal Reserve President Richard Fisher is an FOMC alternate. Fisher was particularly annoyed by last week’s FOMC decision against the “Septaper”. Fisher concluded his speech before the Independent Bankers Association of Texas with his opinion about the “taper caper”:

“Today, I will simply say that I disagreed with the decision of the committee and argued against it. Here is a direct quote from the summation of my intervention at the table during the policy “go round” when Chairman [Ben] Bernanke called on me to speak on whether or not to taper: “Doing nothing at this meeting would increase uncertainty about the future conduct of policy and call the credibility of our communications into question.” I believe that is exactly what has occurred, though I take no pleasure in saying so.”

The Dow Jones Industrial Average (NYSEARCA:DIA) lost 49 points to finish Monday’s trading session at 15,401 for a 0.32 percent decline. The S&P 500 (NYSEARCA:SPY) fell 0.47 percent to close at 1,701. The Nasdaq 100 (NASDAQ:QQQ) declined 0.17 percent to finish at 3,219. The Russell 2000 (NYSEARCA:IWM) dipped 0.06 percent to end the day at 1,072.

The Dow rocketed to new levels and now has fallen back to create a double top resistance formation just below the 15,700 level. Overbought conditions have declined with RSI dropping back into the 50s on the late week action, and upward momentum is also slowing.

Bottom line: Global financial markets face massive uncertainty between now and December. The debate over funding the government and raising the debt ceiling will reach fever pitch over the next thirty days and investors will be looking to the October and December Federal Reserve meetings for more hints regarding quantitative easing. 

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John Nyaradi is the author of The ETF Investing Premium Newsletter.