The stock market jumped sharply last week, making up
for a lack of trading volume with enthusiastic price bidding. The likelihood of
an attack on Syria faded, and investors turned festive, sending share prices up
2% to 3%. Stocks completed a rare seven-consecutive-day win streak last
Wednesday.

A
few weeks ago, a U.S. missile attack on Syria seemed imminent, but that’s on
hold after Moscow-brokered talks began last Thursday on a plan for Syria to
surrender its chemical weapons. With U.S. sabers sheathed for now, investors
are calmer, but the ups and downs in these talks will probably lend some
unwelcome volatility in the next few weeks.

To
some extent, last week’s big rally was also a function of the growing
acceptance of a bullish view that the Federal Reserve will not remove as much
bond-buying stimulus as it signaled back in June. The Fed’s $85 billion in
monthly bond buying has been a major factor in the stock market’s rally over the
past two years by keeping interest rates artificially low.

The Dow Jones Industrial Average climbed 454 points,
or 3%, to 15,376.06. It’s down 2% from record highs set last month. The
Standard & Poor’s 500 index gained 33 points. That’s about 1% below the
all-time high of 1709.67 hit on Aug. 2. The tech heavy Nasdaq Composite index
gained 1.7%, or 62, to 3722.18.

“I’m getting a sense that the market believes
the Fed tapering will be lighter than previously thought,” says Joseph
Amato, president of fund manager Neuberger Berman. The Fed’s policy-setting
committee meets Sept. 17-18, and that “will clearly be the driver of
near-term market sentiment,” he says.

In general, the tapering consensus appears to be
coalescing around an expectation that the Fed will indicate a $10 billion to
$20 billion reduction in bond buying. That would be much less than the $40
billion curtailment that the Fed signaled last June. If the Fed meets market
expectations, that will probably send stocks higher, Amato adds.

Brian Reynolds, chief market strategist at floor
broker Rosenblatt Securities, agrees. Such an outcome would likely push the
S&P 500 index through the 1700 level, where it has met some resistance in
the run-up of the past two weeks.

Stocks
haven’t been able to top the August high because traders are pulling in their
horns ahead of the Federal Open Market Committee meeting. If the Fed meets
consensus, the old highs will be taken out in a few weeks, Reynolds predicts.

He calls scenarios where the Fed delays any tapering
or where it follows through on the larger $40 billion reduction “low
probability outcomes.” In the former case, the market would probably bolt
higher, but in the latter case, there would likely be a “big
selloff.” (Source:  Barrons Online).