September Rally Continues

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Who said September is the scariest month for the markets? Out of the seven trading days of the month so far, six have been positive. Stocks have moved out of their August doldrums and have moved steadily higher in September thanks to a series of encouraging signals on the strength of the U.S. economy. The latest came this past Friday morning with a report that wholesale inventories shot up in July, a sign of confidence that retail sales will soon begin to pick up. And while the recent improvements in our economic indicators have been somewhat incremental, given the deep pessimism about the economy that had set in during August, even the faint glimmers of hope in the job market and other parts of the economy like the trade deficit, have apparently been enough to placate investors for the time being. However, bearish sentiment continues to rule the markets and last week’s gains were made on the second lightest trading volume of the year, as investors remain cautiously on guard for more deterioration in the market

On a sidebar, it was interesting to note that even the Obama administration got into the act last weekas it created quite a buzz when it announced a $50 billion infrastructure plan along with some tweaks to our current tax system. While the Russell and Nasdaq again were relatively weak in absolute terms, only the Russell managed to give some back this week. Each of the three major indices were up less than half of a percent for the week, and oddly enough, each of the three major indices is only up or down less than or just barely over 1% for the year. Incredible!! For all of the worry, concern, doom, gloom, and even the short-lived wild-brained optimism earlier this year, it’s amazing that we are essentially flat for the year in September.

After the 36th week of the year, here’s where we currently stand:

• Dow: +0.14% this week & +0.33% this year

• S&P 500: +0.46% this week & -0.50% this year

• Nasdaq: +0.39% this week & -1.18% this year

• Russell 2000: -1.07% this week & +1.77% this year

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Bond prices, not surprisingly, fell once again last week which subsequently meant that yields headed higher. In the U.S. Treasury market, the yield on the benchmark 10-year note ended the week at 2.799%, up from 2.715% a week earlier, and a huge jump from its recent low of 2.418% on August 25. The 30-year long bond yield similarly climbed to 3.868% this past Friday, from 3.787% the previous week. Keep in mind that falloff in the bond market has pretty much paralleled the rebound in the stock market since the Dow Jones Industrial Average bounced off the 10,000 mark late last month. As we look ahead, the Federal Reserve does not meet again until September 21st, so don’t plan on too many pearls of wisdom coming out of Washington until then. However, recall that last month’s Fed meeting showed considerable division amongst their ranks, so it will be interesting to see if any new drama develops between the Fed Heads at the next meeting. In the general public view though, there are more and more critics of the Fed, who are proclaiming that the Fed really needs to start raising interest rates sooner rather than later. Once again it’ll be “Datapalooza” this week, with significant economic data points being released. If all the data configurations point in one direction, which is unlikely, you might see a more substantive shift in sentiment. But, getting a mixed message is the more likely outcome, perpetuating this current inertia we are experiencing. Next week’s economic calendar includes retail sales due on Tuesday, industrial production and capacity utilization on Wednesday, the Producer Price Index and jobless claims on Thursday and then the Consumer Price Index and University of Michigan/Thomson Reuters consumer confidence on Friday. Don’t expect any ‘blowout’ numbers on any of these measurements. To close out this week, bear in mind that Friday also marks the end of the “quadruple witching” period – the quarterly settlement and expiration of four different types of September equity futures and options contracts, which always tends to exacerbate volatility. Expiration usually leads to greater volume and volatility as players adjust or exercise their derivative positions. But the two-day event, which only happens four times a year in March, June, September and December, could stir up more sudden swings in the market as traders close hedging positions or roll them over at the last minute. Thus you’ve all been forewarned, so keep your seatbelts fastened for what could be another ‘wild and wacky’ week on Wall Street.


Sources:  Barron’s, The Wall Street Journal, The Kirk Report, Kiplinger’s, The New York Times, Associated Press, Reuters, Morningstar

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