In a roller-coaster week, stocks eked out a small victory. Though the major stock indexes all rose, it didn’t much feel like a positive trend.

Blame that on heightened uncertainty and rising volatility, which began the previous week after Federal Reserve officials stirred up fears of an interest-rate increase happening sooner rather than later. Moreover, recent polls suggest that the U.S. presidential election has tightened, contributing to investor insecurity.

This Tuesday and Wednesday, the policy-setting Federal Open Market Committee meets in what is likely the most-watched Fed confab of the year. On balance, the U.S. economic data released last week—including statistics on August retail sales and industrial production—were soft, reinforcing the market’s expectation a hike won’t come this week.

The probability of a rate hike, as measured by the fed-futures market, sank to 20% from more than 30% a week earlier. Still, investors fear a September surprise. The market was also pushed down by lower oil prices, but received some support from Apple (ticker: AAPL). Its shares rose 11%, to $114.92, on indications of strong sales of its new iPhone 7.

Financials stocks were hurt Friday in particular, after Deutsche Bank (DB) confirmed that it is negotiating with the U.S. Department of Justice to settle a $14 billion civil claim resulting from an investigation into its sales of mortgage-backed securities. Shares fell 12% to $13.38, even though the bank says it has “no intent” to accept that figure.

The Dow Jones Industrial Average rose 38 points, or 0.2%, to 18,123.80, while the Standard & Poor’s 500 index added 11 points to 2139.16. Both indexes have fallen, however, in six of the past eight trading sessions. The Nasdaq Composite rose 2.3%, to 5244.57, largely due to Apple’s gain.

“A step-up in volatility doesn’t make anyone comfortable,” says David Kelly, chief global strategist at J.P. Morgan Asset Management.

The smooth summer sailing is over, adds Peter Kenny, an independent market strategist at Kenny & Co. Since Labor Day, there’s been heavy volume on down days, and institutional investors are net sellers in this slide, he says. The odds are greater for a December hike, but that doesn’t mean the Fed won’t move Wednesday, says Kenny.

“The Fed’s in a tough spot,” says Aaron Clark, a portfolio manager at GW&K Investment Management. “The governors want to hike but the window is closing.” The Fed can cry wolf so many times before it loses credibility and dilutes the power of “Fedspeak” in the future. There’s also an important Bank of Japan meeting Wednesday.

A Fed hike Wednesday could be followed by a knee-jerk selloff below 2100 on the S&P 500, says Kenny. That would be a buying opportunity, Clark believes, saying a likely quarter-point hike won’t make a big difference to economic fundamentals.

A relief rally is likely if there’s no hike. But, says Kelly, much depends on how the Fed explains its action or inaction. Ironically, the best outcome for stock markets could be a hike and an announcement that the Fed is likely done for the year. Everyone clear now?

(Source: Barrons Online)

All signs last week pointed to a hobbled U.S. economic recovery and lower interest rates for longer. Stocks basked in the mediocrity.

The Dow Jones Industrial Average rose 97 points, or 0.5%, to 18,491.96—just 0.8% below its record close. The Standard & Poor’s 500 index rose to 2179.98. The Nasdaq Composite rose 0.6%, to 5249.90. Trading was as light as a pair of flip-flops padding around a beach in the Hamptons. Volume on the New York Stock Exchange hit 2.6 billion shares on Monday, the lowest for a full day for the year.

Data released last week showed that job growth limped forward in August, manufacturing unexpectedly contracted, and inflation stayed muted. Strategists and economists agreed that the new data undercuts the case for a September rate hike by the Federal Reserve.

The U.S. added 151,000 jobs in August, less than the 180,000 that economists had expected and below July’s 275,000. Wages limped ahead by 0.1%, and the average workweek contracted slightly. Investors tend to look skeptically at August reports, which include more seasonal adjustments than other months. “We’re in the sweet spot,” says Brad McMillan, chief investment officer at Commonwealth Financial Network. “It wasn’t bad, but it should keep the Fed from raising rates. So we have growth and a few more months of monetary stimulus. You can’t ask for more than that.”

Manufacturing also slumped. The Institute for Supply Management said Thursday that its manufacturing index fell to 49.4 in August, well below the expected 52. Anything below 50 indicates the manufacturing sector is declining. Weakness in manufacturing sometimes heralds a recession, but Michael Shaoul, CEO of Marketfield Asset Management, wrote that manufacturing is “stagnating” because the economy is shifting more quickly toward service jobs. The weakness shows “a narrowing of the economic base into service and a portion of the industrial economy.”

Inflation data gave investors more confidence that the Fed will hold off. A report on personal consumption expenditures indicated that inflation has stayed steady at a core annual rate of 1.6%, still below the Fed’s target.

That said, investors do appear ready for a rate hike, according to Jim Paulsen, chief investment officer at Wells Capital Management.

“I think this suggests that the bond market is continuing to price in a near-term rate hike by the Fed,” he wrote. “If the bond market felt the job numbers pushed back the Fed until December, I doubt yields would have risen today. And that is also the message coming today from stocks, commodities, and the U.S. dollar.”

Oil prices slumped last week more than they have in any week since early July, with futures falling 6.7% to $44.44 a barrel. Investors continue to fret about oversupply in the industry as crude stockpiles grew unexpectedly. And there are more indications that drillers are ramping up again, as unemployment in the energy and mining sector fell to 5.4% in August from 9.3% in July. “The negative effects of lower oil prices on the energy sector are behind us,” wrote Deutsche Bank economist Torsten Slok.

(Source: Barrons Online)