Stocks rallied again last week after the Federal Reserve voted not to raise interest rates this month. While few expected the Fed to act last week, official statements suggest the path to higher rates looks clearer. For the week, the S&P 500 gained 1.19%, the Dow grew 0.76%, the NASDAQ added 1.17%, and the MSCI EAFE stayed stable.[1]

Let's dig more deeply into the Fed's recent statements. The Fed cited continued strength in the labor market, economic growth, and better wage growth in its case for higher interest rates. However, tepid inflation (largely due to lower energy prices) and a desire to get the timing right caused most of the Federal Open Market Committee (FOMC) to vote to hold rates steady.[2] 

Three members of the FOMC dissented from the majority vote, believing that the Fed should have raised interest rates this month. One dissident, Boston Fed President Eric Rosengren, believes that the labor market could overheat in 2017, potentially derailing the economic recovery if action isn't taken.[3] 

 An overheating labor market could send wages to unsustainably high levels while productivity (output per worker per hour) falls. While higher wages might sound pretty good to American workers, unsustainable labor market trends could lead to the sharp recessionary contraction economists want to avoid. However, the health of the labor market doesn't boil down to a single measure of unemployment, and the rest of the committee seems to believe that raising interest rates too soon is riskier than potentially raising them too late. 

The market appears to agree, and investors see the Fed reinforcing the idea that the economy still has room to grow. At least one Wall Street analyst believes we're in the "sixth or seventh inning of a nine inning game."[4] Despite the Fed's increasingly hawkish tone about raising interest rates, Wall Street isn't fully convinced the central bank will pull the trigger in December. Though the FOMC will meet again in November, the Fed is unlikely to make a move until after the election. The latest estimate of trading interest shows that traders view the odds of higher rates in December at 54.2%.[5] 

The Fed has worked hard to convince the public that it intends to raise rates soon. Why? One of the tools the central bank can use to affect markets is that of its "bully pulpit," the leverage of its powerful position. In the past, the Fed has used the bully pulpit to sound the warning about irrational market highs and give Americans plenty of notice about future policy moves. The Fed hopes that telegraphing plays will give markets time to digest the news and avoid a shock.

This week, Monday's presidential debate and a key meeting of Organization of the Petroleum Exporting Countries (OPEC) members could lead to more market volatility. Oil prices have been a major driver of market movements this year and movement toward freezing production (thereby reducing the supply glut that is contributing to low prices) would cause volatility. How likely is a coordinated production freeze? Not very likely since it would require historic cooperation between geopolitical opponents such as Saudi Arabia and Iran.[6] We'll keep you informed.

ECONOMIC CALENDAR:

  • Monday: New Home Sales, Dallas Fed Manufacturing Survey
  • Tuesday: S&P Case-Shiller HPI, Consumer Confidence
  • Wednesday: Durable Goods Orders, EIA Petroleum Status Report
  • Thursday: GDP, International Trade in Goods, Jobless Claims, Pending Home Sales Index
  • Friday: Personal Income and Outlays, Chicago PMI, Consumer Sentiment

HEADLINES:

Housing starts fall more than expected. Groundbreaking on new houses fell 5.8% in August as building activity declined broadly after increasing this summer. However, a rebound in permits for new houses suggests housing demand may strengthen.[7] 

Existing home sales fall for second straight month. Home resales fell in August, dinged by a shortage of housing inventory on the market. Growth in home prices is outpacing wage growth, weighing on sales activity.[8]

Weekly jobless claims fall. The number of Americans filing new claims for unemployment benefits fell by 8,000 to a two-month low last week. Continued labor market growth could give the Fed the green light to raise interest rates in December.[9]

Manufacturing gauge drops to three-month low. A measure of manufacturing activity slipped in September as weakness in new orders and a strong dollar weighed on demand. New orders rose at the slowest rate this year and hiring was slow.[10]

Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. 

Diversification does not guarantee profit nor is it guaranteed to protect assets. 

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.

The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. 

The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The DJIA was invented by Charles Dow back in 1896. 

The Nasdaq Composite is an index of the common stocks and similar securities listed on the NASDAQ stock market and is considered a broad indicator of the performance of stocks of technology companies and growth companies.

The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indexes from Europe, Australia and Southeast Asia. 

The S&P U.S. Investment Grade Corporate Bond Index contains U.S.- and foreign-issued investment-grade corporate bonds denominated in U.S. dollars. 

The SPUSCIG launched on April 09, 2013. All information for an index prior to its Launch Date is back-tested, based on the methodology that was in effect on the Launch Date. Back-tested performance, which is hypothetical and not actual performance, is subject to inherent limitations because it reflects application of an Index methodology and selection of index constituents in hindsight. No theoretical approach can take into account all of the factors in the markets in general and the impact of decisions that might have been made during the actual operation of an index. Actual returns may differ from, and be lower than, back-tested returns.

The S&P/Case-Shiller Home Price Indices are the leading measures of U.S. residential real estate prices, tracking changes in the value of residential real estate. The index is made up of measures of real estate prices in 20 cities and weighted to produce the index. 

The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market. 

The Federal Reserve System (also known as the Federal Reserve and, informally, as the Fed) is the central banking system of the United States. The Federal Reserve System is composed of 12 regional Reserve banks which supervise state member banks. The Federal Reserve System controls the Federal Funds Rate (aka Fed Funds Rate), an important benchmark in financial markets used to influence the supply of money in the U.S. economy.

The Federal Open Market Committee (FOMC) is a committee of the Federal Reserve Board that meets regularly to set monetary policy, including the interest rates that are charged to banks.

In accordance with its statute, the mission of the Organization of the Petroleum Exporting Countries (OPEC) is to coordinate and unify the petroleum policies of its Member Countries and ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers, and a fair return on capital for those investing in the petroleum industry.

Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. 

Past performance does not guarantee future results. 

You cannot invest directly in an index.

Consult your financial professional before making any investment decision. 

Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors. 

These are the views of Platinum Advisor Marketing Strategies, LLC, and not necessarily those of the named representative, Broker dealer or Investment Advisor, and should not be construed as investment advice. Neither the named representative nor the named Broker dealer or Investment Advisor gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information. 

By clicking on these links, you will leave our server, as they are located on another server. We have not independently verified the information available through this link. The link is provided to you as a matter of interest. Please click on the links below to leave and proceed to the selected site. 

[1] http://finance.yahoo.com/quote/%5EGSPC/history?period1=1473998400&period2=1474603200&interval=1d&filter=history&frequency=1d

http://finance.yahoo.com/quote/%5EDJI/history?period1=1473998400&period2=1474603200&interval=1d&filter=history&frequency=1d

http://finance.yahoo.com/quote/%5EIXIC/history?period1=1473998400&period2=1474603200&interval=1d&filter=history&frequency=1d

https://www.msci.com/end-of-day-data-search

[2] http://www.cnbc.com/2016/09/21/fed-leaves-rates-unchanged-in-september-meeting.html

[3] http://www.cnbc.com/2016/09/23/feds-rosengren-explains-his-dissent.html

[4] http://www.cnbc.com/2016/09/23/debate-opec-fed-economy-all-big-risks-lurking-for-markets-in-the-week-ahead.html

[5] http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html [Accessed September 23, 2016]

[6] http://www.cnbc.com/2016/09/25/reuters-america-update-1-algeria-says-all-options-possible-for-algiers-opec-gathering.html

[7] http://www.foxbusiness.com/features/2016/09/20/us-housing-starts-building-permits-fall-in-august.html

[8] http://www.foxbusiness.com/markets/2016/09/22/existing-home-sales-fall-for-second-straight-month.html

[9] http://www.foxbusiness.com/markets/2016/09/22/weekly-jobless-claims-fall-by-8000.html

[10] http://www.marketwatch.com/story/manufacturing-pmi-in-september-slips-to-three-month-low-2016-09-23