The modest reset lower that we have seen materialize over the past two weeks may have more room to run on the down side. As we have discussed since mid-summer, the bull market’s sponsorship is thinning and the broader market is in need of a reset. This reset is needed both to consolidate gains and compress valuations, and also to provide a more sustainable platform, predicated upon anticipated earnings growth and accelerating economic data, from which to move higher. In the cases of earnings and economic data, there remain reasons to be constructive on the market once our called-for modest reset finds a tradable bottom. Q2 results from S&P 500 reporting companies have been solid with 65% beating consensus expectations. Guidance has largely also been quite positive. Most recent economic data has also suggested the US economy is on better footing that it was in the first half of the year. From the Employment Report data to Weekly Jobless Claims and initial Q2 GDP data (all of which we have covered), it is clear that the economy is reaccelerating after an unexpectedly weak first half. The largest variable for investors, given the constructive economic data and earnings backdrop outlined in recent notes and above, is the anticipated Federal Reserve balance sheet reduction effort. In the FOMC Minutes released last week there was clearly a divided committee. Some members were pushing for a step into balance sheet reduction in July while others felt it more prudent to wait until the September meeting. Those members in favor of waiting until September won the argument. The argument being that a modest uptick in inflation before the September meeting is likely and that in that case it would make the sledding a bit less disruptive to credit markets. Given the data outlined above, I think investors are likely expecting some followthrough on balance sheet reduction in September. In any case, the balance sheet reduction that does likely commence in September will be modest and, at least initially, limited as to not disrupt markets. The cautious approach to reduction will to a large degree be informed by the backdrop of gradual monetary tightening. Investors will be playing close attention to Yellen’s talk on Friday at 10:00 AM and Mario Draghi at 1:00 PM (EST).