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The Markets This Week

September 16, 2014 | Weekly Commentary

The sun will come out in November. That’s the hope. Until then, the Wall Street weather report is for seasonal clouds and rain, as investor concerns over rising interest rates intensify.

Last week, stocks fell about 1% after five consecutive weekly rises, the skid greased by Friday’s release of strong August retail sales. And preliminary September consumer-sentiment numbers were the highest in a year.

Good news is bad news because investors believe that a strengthening U.S. economy will force the Federal Reserve to raise rates more quickly than foreseen. While there are plenty of domestic and overseas political developments that could command headlines, expect rates to dominate.

Last week, the Dow Jones Industrial Average fell 150 points or 0.9%, to 16,987.51, and the Standard & Poor’s 500 index lost 22 points to 1985.54. The Nasdaq Composite gave up 15, or 0.3%, to 4567.6.

“It’s a tug of war out there,” says Douglas Coté, chief market strategist at Voya Investment Management, between joy over U.S. economic growth and fear of rising rates. As the Fed winds up its quantitative-easing program, probably next month, he says, “the transition will be key in the immediate term, and markets will be volatile.”

The Commerce Department said Friday that August U.S. retail sales rose 0.6% over July, with positive revisions in previous months. The better-than-expected sales rise, among other positive data, has the market worried that rates will be hiked faster than anticipated, says Michael Arone, chief investment strategist at State Street Global Advisors. The market expects a first hike of the federal-funds rate in mid-2015.

Not surprisingly, these fears hurt bond prices and pushed up 10-year Treasury yields last week to over 2.6% from 2.35% just a few weeks ago, points out Cameron Hinds, chief investment officer for the Great Lakes region at Wells Fargo. (Bond prices fall when yields rise.) The question remains, “When will the Fed raise rates?” he says, “because the current run rate of U.S. economic growth justifies higher rates.” It could be earlier than the market thinks, Hinds adds. Voya’s Coté sees a March hike.

The market seems certain to focus on the Fed’s news conference on Wednesday, which follows the open-market committee meeting.

Yet, there remain other worries for investors, Arone notes, such as violence in the Middle East and Ukraine, the U.S. midterm elections, the anticipated additional easing moves of the European Central Bank, and even Scottish independence. Still, all three pundits believe that stocks will eventually follow the U.S economy higher.

And on Thursday, Alibaba Group (ticker: BABA) should price its initial public offering. Demand seems high, and the IPO price could exceed the range of $60 to $66 and generate over $20 billion.

That same day, we should find out if Scotland will remain part of the United Kingdom. Aye, laddie.

(Source: Barrons Online)

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