Irritants & Confusion

Down big, up big then down again!  Irritants and confusion seem to have taken over the  mood on Wall Street.  We discussed this over the summer.  On 06.26.2014, we listed some of the things bothering the markets at that time.  Some of those things like immigration are now on the back burner.  Others such as Iraq have gained more prominence.  In a post we called "Ticks" we discussed an old country expression that usually went something like, "Davey's got more problems than ticks on a hound" as a metaphor for how a bunch of small irritations could finally add up to a larger problem.  That is how a bunch of smaller issues, anyone on its own might not amount to much, was beginning to give the markets pause.  Today we'll update the list of what I think is bothering markets.  I'll list the tangible concerns up front and then a few intangibles that lurk below the surface.These are in no particular order and some are the same as last summer.

1.  Economy:  Economic growth is still strong.  US GDP grew at a 4.6% clip in the second quarter.  That's the best showing since Q4 2011 according to the Wall Street Journal.  Strong economic growth is a two edged sword right now.  While economic growth is great, markets fear that it will lead to an increase of interest rates sooner rather than later.  Investors are obsessed with the eventual rise of rates.  It is discussed incessantly  in the financial press.  While I think a moderate schedule of rate increases will be well handled by markets as long as the economy continues to expand, Wall Street is clearly bothered by this and it is going to bother investors until we actually see the process to begin.  Not saying it is going to cause stocks to go down but I do think it will contribute to a rise of volatility into 2015.

2.  Middle East:  Israel fought a war over the summer and ISIS exploded on to the scene in Iraq and Syria.  The brutality of ISIS has galvanized a Western response.  It remains to be seen if this can be limited to the current situation where military advisors direct air strikes or whether western nations will need to establish more of a military footprint.  The deterioration in the region has definitely had an effect on investors since June.  

3.  Ukraine:  Ukraine may have taken a backseat over the summer, but the crisis has definitely not ended.  Sanctions imposed by Western nations have had an impact on trade, especially in European economies that do more business with Russia than the United States.  Russia supplies most of Western Europe's natural gas and it remains to be seen how that will play out in the coming months.  As they say in Game of Thrones, "Winter is coming".

Now the intangibles:  Ebola in Africa is much worse than originally thought, you have protests in Hong Kong, elections in Brazil,  and regions of the world such as Scotland and Catalonia that have voted or will vote on independence from their respective mother countries.  You also have the issue of immigration which is on the back burner for now but will likely be revisited after our elections.  On top of this you have the election cycle which could add to volatility between now and November and  statistical concerns regarding market seasonality.

All of these add up to a market that is uncomfortable with itself right now.  Any one or two of these might not be giving investors fits, the combination of the entire list has given traders an excuse to sell.  I think we'll see some clarity as we head towards the end of the year on some of these things but for now the watchword among many investors, especially in the short term has been caution.