The Panic Selling Has Ended

The panic selling due to investors’ fears that the Fed will prematurely reduce stimulus monetary measures may have ended, but cautious trading is expected on Wall Street this week ahead of the release of employment data in the U.S. that usually significantly impacts the market.

The Dow Jones index strengthened by 0.7 percent last week, to 14,909 points, while the S&P 500 rose by 0.9 percent, to 1,606 points, and the Nasdaq index increased by 1.4 percent, to 3,403 points.

This week, a thin trading volume is expected as there is no trading on Thursday due to Independence Day, while trading will be shortened on Wednesday. However, the employment report is eagerly awaited. It will be released on Friday, simultaneously with the report on the number of unemployment claims from the previous week.

“The employment report usually causes greater market volatility, but how many times have employment data and weekly unemployment claims been released simultaneously, especially in a shortened workweek? This will certainly create significant uncertainty,” says Randy Frederick, director at Charles Schwab.

The employment report could provide indications of when the Fed will begin to reduce stimulus measures as the central bank has tied its loose monetary policy to a reduction in the unemployment rate to 6.5 percent.

In a Reuters survey, analysts estimate that in June, the number of employed in the U.S. increased by 170,000, less than the 194,000 average number of employed over the last six months. The unemployment rate could slide from 7.6 to 7.5 percent.

This week, investors will also focus on the report from the Institute for Supply Management regarding industrial activity. It is estimated that activity increased in June, following an unexpected decline in May.

Investors’ attention will also be drawn to the meetings of the leaders of the European and British central banks on Thursday. No changes in monetary policy are expected, but announcements regarding the retention or change of policy direction are always possible.

Thanks to the loose monetary policy of leading central banks worldwide, especially the Fed, the S&P 500 index rose more than 13 percent in the first half of the year, marking its best first half since 1998.

However, in the second quarter, the S&P 500 rose only 2.3 percent, with a decline of 1.5 percent in June. This is a consequence of investors’ fears that the Fed will reduce the stimulus monetary programs that have long supported the market before the economy is firmly on the path of sustainable growth.

As a result, cautious trading is expected at the beginning of the second half of the year. A Reuters survey in the U.S., Europe, and Japan shows that due to market instability, funds have already reduced their equity holdings in their portfolios to the lowest level in nine months in June.

“I think the panic selling after the Fed announced its withdrawal from the market has mostly ended. Central bank officials are telling us that they could reduce stimulus in the fall, depending on the state of the economy. I believe that, so I do not expect any surprises,” says Frederick.