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)