The Main Risks For Economy And Stock Market in Q4

Stock indexes have closed out a volatile third quarter that left all three major indexes roughly where they started back in July. Year-to-date gains are still in the double digits with the S&P 500 up almost +15%, the Dow up almost +11%, and the Nasdaq up around +12%.

Moving into the final quarter of the year, many of the same issues will be driving near-term market sentiment, including ongoing supply chain dislocations, inflation, corporate earnings, the Covid-19 pandemic, and the pace of the U.S. Federal Reserve’s asset purchase “taper” and subsequent interest rate hikes. Adding to that list now is a potential global energy crisis and the domino effect that is starting to have on China’s manufacturing sector. Additionally, anticipated new tax policies and other regulatory shifts in Washington could impact money flow into year-end.

What to watch next week?

Turning to next week, the highlight will be the September Employment Report on Friday. Job gains were much weaker than expected in August with only around +235,000 added. However, even with the official unemployment rate still at over +5%, the Federal Reserve has gotten less dovish and indicated it will go ahead with reducing its asset purchases starting later this year.

They’ve also indicated interest rate hikes could start sooner than expected in 2022 and rise at a faster pace than Wall Street has been anticipating. There is one last official employment report (October 8) before the Fed’s next meeting in November, which Fed Chair Jerome Powell said needs to be “reasonably good” for the central bank to proceed with “taper” by the end of the year.

Other key data next week includes ISM Non-Manufacturing on Tuesday; ADP’s Employment Change report on Wednesday; and Consumer Credit on Thursday. As for the pandemic, the current Covid wave in the U.S. is on the decline with new cases down nearly -30% from the recent peak.

The main risk for the economy

Assuming we don’t see a variant that is capable of getting around vaccines and other immune protections develop, medical experts think the worst of the pandemic may finally be behind us here in the U.S. That means they don’t expect any more major outbreak waves like we saw this summer. However, most think Covid will remain in circulation like other endemic viruses such as those that cause cold and flu.

One thing removed from the list of uncertainties, for now, is a government shutdown as Congress last week passed a continuing resolution bill to fund the government through December 3. As a reminder, lawmakers have until around October 18 to raise the debt ceiling or risk the U.S. defaulting on its debt, so that drama will remain in the headlines for the next few weeks.

I just worry that the U.S. economy is really slowing because of massive labor shortages and supply chain and lack of inventory issues. The worlds #2 economy, China is also slowing.

Technical analysis

The daily MA50 failed to hold. However, there is certainly an accumulation in this market. Few indicators have bullish divergence. Moreover the accumulation the way stronger than the price. With that in mind and cycles turning to the upside in the coming weeks, I will not be surprised to see another wave to the upside. Getting about recent week’s high will bring the price to 4600 – an important Gann level on a daily chart.

On the other hand, if the market breaks last week’s low, the bears will target 4200 levels and 4100 in extension. Frankly, Federal Reserve, Cycles and Accumulation make shorts in October quite risky. I would consider only very short-term trades as of now.