Last Week in Brief: September 12

September 12, 2014

Stocks drifted lower last week. The S&P 500 falling back below the 2,000 level. Small caps descended into negative territory on the year.
The headlines shouted news of Washington's resolve to attack ISIS, Scotland's independence vote, and the ceasefire in Ukraine. Yet, the only news upon which investors really focused was the growing uncertainty over the timing of the Fed's first interest rate hike. Following six years of ZIRP (zero-percent rate policy), investors are acclimating to the idea that rising rates are nigh.
But, rising rates will only indicate the Fed's certainty that the economy is on solid ground. With benign inflation, and the recent drop in crude prices, the Fed will have room to tighten slowly. Going from 0% money to 1% money? Might not be so bad.
The Fed meets this week. Will the Open Market Committee change the verbiage in its commentary to reflect intentions of hiking rates sooner than later? That is driving the market's recent tension.
Of course, the stock market has been smoking easy money since early 2009. Following record-low rates and the Fed's bond purchases, the monetary base has gone from $800 billion to over $4 trillion. So, that easy money addiction may not be kicked easily. We may need to trick the U.S. economy to a special location. Sit it down on a couch. Surround it with close friends. And hold an intervention. Because nobody knows how it will respond when the cheap money fix is gone.
Bonds, specifically high-yield corporate credit, could get volatile. Which explains the Fed's recent attempts to limit the rush out of bonds by imposing an exit fee to sell such instruments.
Truth is, nobody knows how this grand monetary experiment will end. If someone says they do, they're lying. Investors will be better served reacting to what they see rather than speculating on what may lie ahead.
We believe the Fed is likely to reinforce the status quo. Yellen and crew are not in the surprises business. Big policy changes are typically leaked before announced. Accordingly, stocks will likely reassert themselves soon. Though we should not be surprised by a near-term uptick in volatility. Remember, September is traditionally the worst month of the year. Time remains for the boogey man to rear his ugly head and put a chill into investors' spines.
Speaking of boogey men, the House Judiciary Committee remained mute last week on whether the president has the constitutional authority to conduct air strikes in Syria. Yet, 12 of its members did find time to write to NFL commissioner Roger Goodell demanding "the highest level of transparency" concerning the NFL's handling of the Ray Rice domestic abuse case. Not exactly what the Founders had in mind when they created a system of checks and balances.
The Good
August retail sales jumped 0.6%, thanks to a surge in autos and building material and gardening equipment... Q2 GDP growth is getting revised higher - rumor has it being revised by a large number... Slow growth spending and a brisk revenue increase reduced the deficit... Michigan consumer sentiment beat expectations...
The Bad
A tenuous cease fire in Ukraine saw both sides continue to exchange gun fire, and international monitors came under artillery fire... Chinese imports have slowed dramatically... A recent report by Fed economists says that the low labor force participation rate may not have the ability to increase much... The chances of a "yes" vote on Scottish secession have increased. This is a good piece on what Scottish independence could mean for investors...
The Ugly
The CDC warned the U.S. medical community of the coming possibility of a domestic Ebola outbreak... Scary.
Weekly Results
Major markets finished lower last week. The DJIA fell 0.87%, the S&P 500 lost 1.10%, and the Nasdaq dropped 0.33%. Small cap stocks declined 0.81%. And the 10-year Treasury bond yield rose 15 basis points to 2.61%. Gold rose $7.54 per ounce, or 0.59%.

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