Traders React Pre-Fed as Oil and Rates Climb

Every morning before the opening bell, the Schwab Market Update sets the stage for the day ahead, covering key market movers, economic developments, and emerging themes. Each edition includes "Three things to watch" while Thursdays feature a weekly section, "Crypto currents." This recap revisits select items for those who may have missed them, helping traders head into the weekend better informed.

A Fed rate hike on Wednesday might influence different stock market sectors, but the impact could depend on whether the Fed hikes once or twice versus embarking on a long cycle. A hike or two might not have much effect if the Fed makes clear these are minor adjustments. And of course, there's no guarantee of a hike at all. If hikes happen, the tech sector likely will be in the spotlight, as its earnings have powered Wall Street this year and high rates tend to hurt perceived future earnings growth. Tech also is a long-duration part of the market, meaning its strength depends on expectations of growth that could take place well into the future and less on the impact of current conditions. "When you face higher interest rates, it tends to put downward pressure on those longer-duration segments of the equity market," said Liz Ann Sonders, chief investment strategist at the Schwab Center for Financial Research, or SCFR, in a recent episode of the Schwab On Investing Podcast. Industrials is another sector to monitor if rates start rising, because it's been lifted by the build-out of AI and the investments in data centers, Sonders added.

The Schwab Trading Activity Index™ (STAX) fell to 57.50 in August, down from July's multi-year peak of 59.80. The index analyzes retail investor stock positions and trading activity from Schwab's client accounts to illuminate what investors actually did and how they were positioned in the markets. August trading activity suggests Schwab's retail clients became more selective as markets recovered. Rather than pulling back, many appeared to rebalance, taking profits in high-beta software stocks after sharp rebounds while remaining engaged with growth and innovation leaders such as SpaceX (SPCX) and Nvidia (NVDA). At the sector level, industrials, utilities, and real estate were the only S&P 500 sectors to attract net buying from Schwab's retail clients in August, while info tech, communication services, and financials saw the largest net selling. From a demographic perspective, Gen X clients continued to lead net buying by age cohort, and self-directed traders remained much more skewed toward net buying when compared to self-identified investors.

Hurricane season in the Gulf of Mexico has been quiet so far, but investors might want to get used to watching weather reports in coming weeks. U.S. WTI Crude prices topped $100 per barrel this week as the war crimps international production and exports, so a hurricane aimed at Gulf oil rigs would conceivably affect prices more than in a normal year. The market impact would depend on the strength of the hurricane and its path. Hurricanes affect more than oil. They can wreak havoc on retailers, airlines, the hotel and restaurant industry, and other businesses with production facilities nearby. A major hurricane can even alter U.S. monthly jobs growth, frequently depressing nonfarm payrolls data a month or two before what's often a subsequent rebound as the government finally sort outs the chaos. Construction and materials firms often get a lift from rebuilding. Municipal bonds are another asset that can feel the impact of a hurricane. Of course, no storm is the same and none needs to necessarily follow that formula.

Bitcoin looks different than it did a month ago. Not only were a lot of shorts squeezed out of the market during the August rally, futures open interest rose 16% at the same time, something that tends to happen during bullish uptrends, said Jim Ferraioli, director of digital currencies research and strategy at SCFR. But that is not to say that the bulls are back in control. Instead, both positioning and sentiment have become more balanced, while spot bitcoin exchange-traded products are still seeing strong net inflows. Meanwhile, bitcoin is consolidating in a narrowing trading range near the average investor cost basis of $80,000. A move to the upside would put the average investor back in the black, which would likely improve sentiment even more. On the flip side, a failure to hold recent gains would put investors back into the red, likely souring sentiment and perhaps triggering more selling.

Technically, the major indices have held their ground and mostly traded in sideways consolidation patterns over the past month. This price action could be interpreted as relatively bullish given the recent escalation in Iran and correspondingly higher oil prices and yields. "However, I'm not sure how resilient U.S. equities will be if the Iran conflict gets worse and oil prices and yields continue to march higher," Nathan Peterson, Director of Derivatives Research and Strategy at SCFR, said late last week. "Throw in bearish seasonality during the month of September, along with the potential for higher volume and adjustments to positioning when most fund managers and traders come back from vacation, and I’m going to stay with a 'cautious' outlook for the week." For the S&P 500^® Index, 7,600 appears to be an important support area, though it slipped just shy of this in Thursday afternoon's trading. From a momentum standpoint, the index gained some ground late last week when its Relative Strength Index topped 55 after previously falling under 50. That's roughly mid-range but somewhat positive, still well below the mid-August peak above 70.