Stocks broke a six-week winning streak, slumping nearly 4%. The rout last week came amid falling commodity prices and disappointing third-quarter earnings reports from key retailers.

Lurking in the background is market anxiety about the Federal Reserve’s expected interest-rate increase next month. After the release of more economic data showing weakness, investors are trapped between poor global growth and the expected Fed hike.

The Dow Jones Industrial Average fell 3.7% or 665 points last week to 17,245.24, while the Standard & Poor’s 500 index lost 76 to 2023.04. The Nasdaq Composite fell 4.3% last week to 4927.88. Oil fell 8% to $40.74 per barrel.

On Dec. 16, the Federal Open Market Committee concludes its next meeting, which might see the first rate hike of the benchmark federal-funds rate, however small, in about a decade. As a report from Wellington Shields noted: The last time the Fed raised that rate, the iPhone didn’t exist.

Data Monday showed China imports fell 19% in October, and commodities were whacked last week. That’s interpreted as a lack of demand, so “the global growth scare has returned,” says David Donabedian, chief investment officer at Atlantic Trust Private Wealth Management. “This time, however, the market senses that the Fed won’t back down on the expected hike.”

The week’s drop began in earnest Thursday after Nordstrom (ticker: JWN) reported disappointing third-quarter earnings and lowered guidance. That followed similarly bad news Wednesday from Macy’s (M) and others.

The “horrible” retail figures took some wind out of a six-week rally that had made investors complacent, says Aaron Clark, a portfolio manager with GW&K Investment Management. Many assumed the October stock gains were a forerunner of “an end-of-year melt-up,” he adds, in what is traditionally a good season for stocks. This week, however, better earnings reports from Home Depot (HD) and Lowe’s (LOW) could reverse the negative sentiment, he says. While many are expecting an end-of-year market flourish, “the Santa rally actually happened in October,” argues Terry Sandven, chief equity strategist at U.S. Bank Wealth Management.

There are lingering concerns about the pace of corporate earnings growth, the Fed rate liftoff, and mixed expectations for holiday retail sales, he says. The analysts’ corporate profit-growth estimate of 9% next year for the S&P 500 is probably too high, and as estimates reset lower the market is likely to stay in the narrow range it’s inhabited most of the year. Holiday sales could be the swing factor, he says.

Friday saw the release of contradictory economic news. The University of Michigan preliminary November sentiment index rose above expectations to 93.1 from 90 in October. The Labor Department said October producer prices decreased 0.4%, weaker than an anticipated rise of 0.2%. The Commerce Department said retail sales rose 0.1% last month, also softer than expected.

(Source: Barrons Online)

The stock market rose last week in mostly humdrum trading, but closed off mid-week highs, restrained by the growing likelihood that the Federal Reserve will raise interest rates in a matter of weeks.

A nearly 2% rise by Wednesday began to fade after Fed Chair Janet Yellen said that a hike was a “live possibility” for the Dec. 15-16 Federal Open Market Committee meeting. The FOMC decides the key benchmark federal-funds rate, the overnight rate depository institutions use to lend to each other on Fed balances.

Strong jobs data Friday, which should help push the Fed to hike, dampened spirits some more, but stocks still managed a healthy 1% rise for the week. Financials rallied 2.7% on the rate sentiment, while the high-dividend-paying utility and telecom sectors fell 3.6% and 1.6%, respectively.

The Dow Jones Industrial Average rose 1.4% or 247 points last week to 17,910.33, while the Standard & Poor’s 500 index added 20 to 2099.20. The Nasdaq Composite gained 1.9% last week to 5147.12.

The jobs data was a “game changer” in terms of increasing the probability of a Fed rate hike next month, says Michael Sheldon, chief market strategist at RDM Financial Group. “It was solid across the board,” he adds. Friday, the Labor Department said October payrolls grew by 271,000, above expectations of 185,000, and that the unemployment rate fell to 5% from 5.1%. Average and weekly earnings were up nicely, too.

Below the headline jobs data, there were changes that point to some winning sectors in the near term, Kinahan says. Jobs grew in the retail and financial sectors, so retail, restaurants and bank stocks could be winners, he says.

Meanwhile, “bond proxies,” such as utilities, telecom, and some high-dividend, low-growth staples stocks will face some head winds. “You could see pressure on them building up,” he says.

“We are likely at the beginning of a rate- cycle tightening,” says RDM’s Shelton. The market will soon be considering what happens after the first hike. Is it one-and-done for a while, or will the Fed raise rates faster than the market expects? Sheldon sees markets choppy in the near term.

(Source: Barrons Online)