The U.S. Federal Reserve will meet this week to discuss rates. What could happen to U.S.stock markets?

(Image by www.lumaxart.com via flickr)

 Is it too early?

For months, this has been called the normalization meeting, andthe Fed has been expected to begin a series of rate hikes afterseveral years of supportive monetary policy. However, thereality is that the Sept. 16–17meeting could not happen at a worse time. The turbulence shown by the Chinese stock market in August, which was reflected in U.S. stock prices, might have put a stop to the plans of Fed Chairwoman Janet Yellen. There is an emerging idea thata hike right now would have very negative consequences for the U.S.economy. As a result, the Fed might decide to adopt a wait-and-see approach and postpone the decision for several months. 

Inflation stays very low for now

In effect, inflation is very low and should stay there for the foreseeable future. The 0.3% year-on-year increase of the Personal Consumption Expenditures (PCE) index reported in July was far lower than the Fedtarget of 2.0%. In addition, wages are not rising, while the strong dollar is taking a toll on exports. The manufacturing sector, which is mainlydetermined by foreign trade, has been penalized, declining 0.7% in the first quarter of 2015 before increasing 1.30% in the second quarter. The first six months of 2015 were the slowest for manufacturing since the end of the Great Recession, compared to the first six months of 2014. In addition, the recessionary winds blowing across the globe do not aidinternational commerce. Foreign trade fell worldwide, with the exception of Japan and the United Kingdom, which had combined trade flows of only 8.0%.

Stocks might look for a base

Although the U.S. gross national product grew nearly 4.0% in the second quarter of this year, U.S. industrial production fell 1.4% in the second quarter after going nowhere during the first quarter. Apparently, June’s rebound was supported by growth in the mining sector, after falling inboth April and May. The short-term scenario also appears cloudy, according to the latest New York and Philadelphia Fed surveys. Confidence among business leaders in the manufacturing sector has deteriorated. Domestic demand has been lackluster. In June, retail sales declined 0.3% and were negative when excluding gasoline, cars, andbuilding materials. The real estate market, though, remains strong.According to past performance, it could trend up for 9 to 10 years from the lows hit in 2009–10.

The S&P 500 index finds strong support at 1870/1830. This area might be tested again in the short term. If it holds, it could fuel a bounce of the index to 2050/2010 in the last two or three months of the year. This bounce could be helped by the extreme oversold conditions shown by various technical and volatility indicators.