Investors are watching the economic data in the S&P 500 very closely. The data reveals that industrial production has declined slightly in Q3 of this year, compared to last year. Meanwhile, employment levels are on the rise. However, consumers have been pulling back from their work in recent months, due to slower wage growth. Consumer spending has picked up only recently, but companies are still cautious about laying off employees. To add to this dilemma, consumers are saving more money for the rainy days rather than spending it on unproductive assets.
As we move towards the expiration of the stimulus programs at the end of this year, the question that will be on everybody’s lips is what might occur to the market when the Federal Reserve starts to raise interest rates again? If the economic data is good, then the market should continue its rally, and there is a strong likelihood that it will go higher. The S&P 500 might hit another all-time high, but the market will remain bullish, especially if unemployment rates fall below 5%. Unemployment rate falling below the official measure of five percent would trigger a correction in the market.
But what happens when the Federal Reserve raises rates and the dollar loses value? If the economic data turns negative and unemployment rises, it could trigger a sell-off in the S&P 500. Will investors still buy into the market when it experiences a correction? In a market like the stock market, where investors have lots of choices, the answer may vary. Some might think that a correction will last for a long time. Others might think that they’ll ride out the correction, and by the time the S&P 500 regains strength, the weak dollar will be history, and the rally will resume.
If the U.S. government starts to raise interest rates, the dollar will likely lose value. That’s one argument for holding off on buying the dollar. But if the economic data turns up negative, a sell-off in the U.S. dollar could follow. So, will investors still buy into the market when it experiences a correction? Again, the answer will vary.
Are investors waiting for a Fed rate hike to re-start a rally? A Fed rate hike could cause a dollar rally, as it does happen every time the central bank increases its interest rate. The key to this argument is timing: Right before an interest rate increase, a market may be ripe for a breakout upward trend in the U.S. dollar. Then, as rates start to rise, investors will fear that the rally will be short-lived, and they’ll want to pull out of the market as quickly as possible.
Is it a bullish market, or a bearish market? In technical analysis, it’s important to know whether a stock is overbought or oversold. In a bearish market, the market is considered oversold because the supply exceeds the demand. In a bullish market, the market is considered overbought because the supply exceeds the demand. So, a rally in the S&P 500 could last as long as the bulls are around. Once the bulls go away, the sellers can cash in and the losers have little to no equity.
Is this the end of the rally in the S&P 500? Not quite. Economic data will eventually force the dollar back down again, and traders must decide whether to ride out the bearish period and ride the rest of the market out, or sell out now to lock in profits before the bears rule the day. In my opinion, it is best to sell at the end of a bullish market, and ride out the rest of the trend with a bearish approach.