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The Markets This Week

September 30, 2014 | Weekly Commentary

Stocks closed out a rough week with a buoyant Friday, but the mini-rally wasn’t enough to make up for poor performances earlier. All the major indexes fell 1% or more. Like the previous week, large-cap stocks outperformed small caps, but this time they just fell less instead of rising.

While market observers blame the retreat on numerous factors, from mixed U.S. economic data out this week to continued concerns about Russian moves to drag Ukraine back into its sphere of influence, mostly there’s a vague unease over the state of global economic growth.

U.S. economic expansion is proceeding apace, but the rest of the developed nations are limping along. That translated into the risk-off trade, which culminated in a big downdraft and heavy volume Thursday. Otherwise trading was quiet during the Rosh Hashanah religious holidays.

Last week, the Dow Jones Industrial Average lost 167 points, or 1%, to 17,113.15, while the Standard & Poor’s 500 index gave up 28 points to 1982.85. The Nasdaq Composite index ended at 4512.19, down 1.5% or 68.

On Friday, the Commerce Department raised its previous estimate of second quarter U.S. gross domestic product growth to a 4.6% annual rate, about as expected, from the previous 4.2%. Earlier in the week, however, Germany’s IFO survey showed Teutonic business confidence in September dropped to its worst level in more than a year.

If there was one reason for the market drop, says Bill Stone, chief investment strategist at PNC Wealth Management, “It’s worries about global growth.” Investors are concerned about how much more economic pain is to come in Europe and Japan, he adds. This week’s meeting of the European Central Bank governing council Thursday could be key for stocks short term, Stone says, because many are expecting details in the ECB press conference to follow. The bank has previously promised a version of quantitative easing that includes buying covered bonds and asset-back securities. Investors want to know how much, Stone adds.

At the end of October, investors will again turn their attention to the Federal Open Market Committee meeting, says Robert Pavlik, chief market strategist at Banyan Partners. While there’s no press conference scheduled afterward on Oct. 29, investors are aware that “the next Fed move, whenever it comes, can’t be tapering. It will be raising rates.” Volatility could be introduced on rising speculation about that infamous rate hike expected in mid-2015.

Despite the losses, the market remains near all-time highs, and some bullish exhaustion shouldn’t be a surprise. Bernie McGinn, president of McGinn Investment Management, says he’s been “more aggressive” on the sell side in recent weeks, “even though I don’t feel any more negative than before. It’s just that I don’t see a whole lot of stocks that say ‘Buy Me! Buy Me!’ ” A 10% correction “would be welcome,” he adds, and allow him to start nibbling at the stocks on his buy list.

(Source: Barrons Online)

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