Black and white are investors' favorite colors. More often than not, however, market sentiment is a palette of varying shades of gray.
For weeks, the stock market has been focused on Tuesday's Federal Open Market Committee meeting with hopes that the more than 2-year-long period of 17 straight interest rate hikes would end. Friday's weaker-than-expected employment data seemed to underscore the likelihood that the Federal Reserve's interest rate policy committee would provide what the market wants. But is that what the market really wants?
The employment report showed weaker-than-anticipated job growth and a rise in the July unemployment rate to 4.8 percent that investors hoped would lead the Fed to stop raising rates. Instead, the report prompted a second thought. What if slowing job growth leads to weaker GDP and earnings growth?
And then there is the difference between pausing in a rate cycle versus changing direction.
Data over a long period strongly suggest that the market responds well once the Fed begins a rate cutting cycle, but the period between rate hikes and rate cuts is another story. The unknown about whether the Fed was ending a rate hike cycle or merely going on hold before resuming more rate hikes often did not provide an environment that inspired confidence.
Another round of this uncertainty could be the consequence of Tuesday's policy announcement -- even if the Fed does not raise rates. Unless it makes an uncharacteristically clear statement that the next move on rates will be a cut, the market will be colored by one of the many shades of gray.
Seasonal influences often are viewed as guides of what to do. But they more often than not merely lighten or darken the gray rather than change the hue.
August, for example, notoriously is not a great market month. Since 1950, an average 0.7 percent loss makes August the second-weakest month of the year, second only to the average 0.74 percent loss in September. Since 1990, the average August performance has been slightly weaker. Weakness in both months is more pronounced on average in mid-term election years when the S&P 500 in August averages a 0.77 percent loss and slips 1.32 percent in September.
But there have been some major August exceptions, like 1984 when the S&P 500 gained 10.63 percent, the 7.12 percent gain in 1986, and the 6.07 percent rise in 2000.
Further complicating seasonal factors is that as poor as the average returns might be for August, since 1950, that month has been 55 percent more likely to post at least a small gain than June, July and September have been.
This Tuesday, once again, investors will be looking for a black-and-white statement from the Fed. The chance of getting one falls somewhere between zero and none.
The Fed largely is trapped in the same gray landscape the market is. Some economic data show signs of weakness relative to prior months, but even the most pronounced downturns in some indicators are not enough to alter indications that the U.S. economy remains in an expansion mode.
The inflation path is no more certain.
For investors, the lack of clarity -- no blacks of whites -- is an ever-present problem. There is only one way to deal with it.
The phrase "the trend is your friend" coined by market technician Marty Zweig offers the most reliable method of dealing with the market and the economy. Instead of trying to predict what will happen or waiting for a pronouncement so clear no one can mistake it, the only solution is to be a trend follower. If a trend is obvious, follow it. When there is no discernible trend, stay away and wait for one to develop.
Virtually by definition, you will be late relative to the optimal times to act, but that's better than waiting for total clarity, which seldom develops, and you will avoid the temptation to make what could be disastrous guesses.
