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Changing Fed Stance Means More Stock Volatility

Next Clues in Jobs Data

Given these factors, Friday's nonfarm payrolls report takes on a higher level of importance. The highly-correlated ADP private employment report came in lower than consensus estimates, matching the weakening trends seen in the employment component of this month's Institute of Supply Management (ISM) survey.

So far this year, monthly nonfarm payrolls have come in at an average of 195,000 jobs. This average is well above the expectation for this month's expected number (a gain of 165,000 jobs).

This week's data will be pivotal in determining the near-term direction of both stock values and perceived expectations for any changes in the Federal Reserve's policy stance.

While the summer months are typically characterized by declines in market volatility, there is real potential for the activity seen this year to be different as there is enough evidence to suggest the Fed is at a major inflection point and ready to signal changes in its historic quantitative easing program.

With prices holding within striking distance of all-time highs in both the Dow and S&P 500, there is still risk for substantial downside corrections if the next round of employment figures are encouraging.


Increases in volatility become more likely if this is the case as investors will re-position themselves in preparation for expected declines in corporate earnings. Even with the declines seen in recent weeks, the S&P has still managed to post gains of nearly 15% year-to-date. But if the majority opinion at the Federal Reserve shows a bias toward major policy changes, a central pillar supporting this rally will be removed and deeper downside corrections in stock values are likely.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Richard Cox is a university teacher in international trade and finance. His articles appear on a variety of Web sites, including MarketBulls.net, Seeking Alpha, FX Street and others. Investing strategies are based on technical and fundamental analysis of all the major asset classes (stock indices, currencies and commodities). Trade ideas are generally based on time horizons of one to six months.
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