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The Markets This Week

September 22, 2015 | Weekly Commentary

Stocks stumbled last week amid concerns about slowing global growth, set off by the Federal Reserve decision not to raise interest rates. The broad market fell slightly for the week ended Friday, reversing the nearly 2% rise that had been reached ahead of Thursday’s Federal Open Market Committee meeting. Prior to the meeting, market participants appeared pretty evenly divided as to whether there would be a hike. Yet Friday’s big losses suggest that an increase was expected, if not desired, by investors.

The FOMC left the federal-funds target rate band unchanged at zero to 0.25%. Fed Chair Janet Yellen highlighted weak signs of inflation and the potential negative impact of global economic and financial developments on the U.S. while implying that the Fed had been ready to raise rates.

Last week, the Dow lost 0.3%, or 49 points, to 16,384.58, and the Standard & Poor’s 500 index lost three points to 1958.03. The Nasdaq Composite bucked the trend slightly and rose 0.1%, or five points, to 4827.23.

The worm has turned—perhaps permanently—when it comes to the market’s reaction to Fed efforts to keep rates low. As recently as this past spring, the central bank’s reluctance to hike occasioned stock rises and celebrations. The same stance now has investors fretting about economic growth in the rest of the world and the attendant impact on U.S. multinationals’ corporate profits.

The current easy-money policy, which has worked for six years, is no longer enough to get stocks going, says Steven Sosnick, senior trader at Timber Hill. Another round of quantitative easing would be fraught with difficulties, given that it would indicate lack of growth, which would spook investors. At some point the economy has to deliver, he says.

John Manley, chief equity strategist at Wells Fargo Funds Management, remains optimistic that the U.S. economy will revive. Manley “guesses” there will be a hike next month, and that the market will view it positively. It will be viewed as a neutral stance, not “tightening,” and “the Fed saying the U.S. economy is OK.”

The parlor game—will the Fed raise this year?—goes on, with two more FOMC meetings left: Oct. 27-28 and Dec. 15-16.

The Fed is beginning to lose credibility, Kenneth Polcari, director of NYSE floor operations at O’Neil Securities, suggests. The Fed could have hiked back in the spring, when the world seemed to be in a better place economically. “A 25-basis-point [increase] is nothing…but now the Fed is backed into a corner,” he says. “Will it be October or December? That’s a bad place to be.”

Yellen has also opened the Pandora’s box of a third Fed mandate, related to global growth, in addition to those pertaining to employment and inflation, he says. What will happen in December, if global markets and economies are still in turmoil, he asks. Does U.S. monetary policy depend on that now?

Expect volatility over the next few weeks as the market searches for directional signs. On Thursday, Yellen’s planned speech on inflation could move stocks. Then third-quarter earnings season kicks off in the second week of October, giving investors a better sense of how the slowdown in emerging- markets growth has affected corporate profits. Until then, the market might lurch about without much sustained direction.

(Source: Barrons Online)

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