Stocks stumbled last week amid concerns about slowing global growth, set off by the Federal Reserve decision not to raise interest rates. The broad market fell slightly for the week ended Friday, reversing the nearly 2% rise that had been reached ahead of Thursday’s Federal Open Market Committee meeting. Prior to the meeting, market participants appeared pretty evenly divided as to whether there would be a hike. Yet Friday’s big losses suggest that an increase was expected, if not desired, by investors.

The FOMC left the federal-funds target rate band unchanged at zero to 0.25%. Fed Chair Janet Yellen highlighted weak signs of inflation and the potential negative impact of global economic and financial developments on the U.S. while implying that the Fed had been ready to raise rates.

Last week, the Dow lost 0.3%, or 49 points, to 16,384.58, and the Standard & Poor’s 500 index lost three points to 1958.03. The Nasdaq Composite bucked the trend slightly and rose 0.1%, or five points, to 4827.23.

The worm has turned—perhaps permanently—when it comes to the market’s reaction to Fed efforts to keep rates low. As recently as this past spring, the central bank’s reluctance to hike occasioned stock rises and celebrations. The same stance now has investors fretting about economic growth in the rest of the world and the attendant impact on U.S. multinationals’ corporate profits.

The current easy-money policy, which has worked for six years, is no longer enough to get stocks going, says Steven Sosnick, senior trader at Timber Hill. Another round of quantitative easing would be fraught with difficulties, given that it would indicate lack of growth, which would spook investors. At some point the economy has to deliver, he says.

John Manley, chief equity strategist at Wells Fargo Funds Management, remains optimistic that the U.S. economy will revive. Manley “guesses” there will be a hike next month, and that the market will view it positively. It will be viewed as a neutral stance, not “tightening,” and “the Fed saying the U.S. economy is OK.”

The parlor game—will the Fed raise this year?—goes on, with two more FOMC meetings left: Oct. 27-28 and Dec. 15-16.

The Fed is beginning to lose credibility, Kenneth Polcari, director of NYSE floor operations at O’Neil Securities, suggests. The Fed could have hiked back in the spring, when the world seemed to be in a better place economically. “A 25-basis-point [increase] is nothing…but now the Fed is backed into a corner,” he says. “Will it be October or December? That’s a bad place to be.”

Yellen has also opened the Pandora’s box of a third Fed mandate, related to global growth, in addition to those pertaining to employment and inflation, he says. What will happen in December, if global markets and economies are still in turmoil, he asks. Does U.S. monetary policy depend on that now?

Expect volatility over the next few weeks as the market searches for directional signs. On Thursday, Yellen’s planned speech on inflation could move stocks. Then third-quarter earnings season kicks off in the second week of October, giving investors a better sense of how the slowdown in emerging- markets growth has affected corporate profits. Until then, the market might lurch about without much sustained direction.

(Source: Barrons Online)

A rocky week on Wall Street ended solidly in the black, as the Dow Jones industrials recorded their largest weekly gain in nearly six months. But investors still sounded rattled as they await the Federal Reserve’s decision this week about whether to raise interest rates.

“The overarching theme is that volatility will be here to stay—intraday, intraweek—until we get the answers to two questions,” says Lori Heinel, chief portfolio strategist at State Street Global Advisors. “Where is global growth headed? And what is the Fed going to do?”

Investors cheered news of continued gains in the job market. The number of job openings in the U.S. grew to a new record of 5.75 million last week, according to the Department of Labor, which has been tracking openings since 2000. China cut its expected growth rate to 7.3% from 7.4%, but vowed to introduce more stimulus measures. In general the news out of China seemed incrementally better, or at least not appreciably worse, and that seemed to lift investors, said Keith Lerner, chief market strategist at SunTrust Private Wealth Management.

The Dow jumped 331 points, or 2.1%, last week, to 16,433.09. The Standard & Poor’s 500 rose 40 points to 1961.05. The Nasdaq Composite index rose 138 points, or 3%, to 4822.34. Still, there’s little indication the gains will stick. The S&P 500 has flip-flopped from gains to losses and back again for 10 straight weeks. For the Dow, it has been nine weeks.

Indeed, a pessimistic streak runs through the market. Investors pulled $16.2 billion out of equity funds in the week ended Sept. 9, Lipper data show. A Merrill Lynch analysis estimates that outflows have totaled $46 billion over four weeks. A survey by Investors Intelligence showed more investors were bearish than bullish for the first time since October 2011—although some interpret that as a contrary indicator.

Lerner says that the markets are still in the process of bottoming after the panicky selloff in late August. These kinds of corrections tend to result in herky-jerky trading for weeks, if not months. But stocks eventually bounce back. Lerner says there are six other times in history when markets fell 10% or more in four days. Every single time, the market rose within a year.

In the near term, the Fed’s actions at its Sept. 16-17 meeting should determine trading patterns. The Street is clearly flummoxed. About half of the 78 economists surveyed by Bloomberg predicted the Fed will lift rates, but traders seem less convinced. Fed-funds futures indicate a 28% chance of a rate increase.

If the Fed chooses to raise its interest-rate target, the market would have a “knee-jerk negative reaction,” Heinel predicts.

A change in rates could unsettle global markets and help tip them into recession.

(Source: Barrons Online)