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Stocks close modestly higher as Fed rate hike fears fade

Every portfolio benefits from bonds; they provide a cushion when the stock market hits a rough patch. But avoiding stocks completely could mean your investment won’t grow any faster than the rate of inflation. – Suze Orman

The major stock averages closed modestly higher last week as a weaker than expected jobs report probably took a September interest rate hike off the table. The August employment report showed that only 151,000 jobs were created, less than the forecast of about 180,000. While the unemployment rate remained unchanged at 4.9%, wages grew by a disappointing 0.1%. August has historically been slower for job creation than other months due to vacations, but the subpar job growth will likely mean that the Federal Reserve will remain on hold for now. Other economic data released last week seemed to support this view. The Institute for Supply Management (ISM) manufacturing index for August dipped below 50, an indication that the manufacturing sector is contracting. Further evidence of economic weakness and lack of inflation could also be found in the personal consumption expenditures (PCE) price index, which only rose 0.1% in July and is up 1.6% over the last twelve months. This is the Fed’s preferred measure of inflation and the fact that it is running below the Fed’s inflation target of 2% gives investors confidence that interest rates aren’t headed higher anytime soon. All of this weaker than expected economic data convinced most economists and strategists that the Federal Reserve will forego a hike in the fed funds rate at their September meeting. Stocks reacted favorably to this belief since rising interest rates tend to hurt the performance of stocks in a slow growth environment. On the other hand, bond prices fell and interest rates rose modestly as the bond market senses the Fed’s impatience to gradually normalize monetary policy. But if the Fed is truly data dependent, the evidence suggests that postponing any increase in interest rates is probably the most prudent course of action.

Last Week

The rest of the economic data released last week was generally mixed. Consumer spending in July rose modestly and was in line with expectations while consumer confidence in August hit the highest level in nearly a year. Pending home sales in July rose and reached the second highest level in the last ten years. Higher home prices and low inventory prevented the number from being even higher. Construction spending was flat in July and U.S. productivity fell 0.6% in the second quarter, the biggest decline since 2013. This could be a bad sign for the economy as it might mean weaker profits and slower wage gains, but it is difficult to measure in an economy dominated by service-oriented companies.

For the week, the Dow Jones Industrial Average rose 0.5% to close at 18,491 while the S&P 500 Index also added 0.5% to close at 2,179. The Nasdaq Composite Index gained 0.6% to close at 5,249.

This Week

This will be a particularly slow week for both economic data and quarterly earnings reports. The only economic report of note is the ISM non-manufacturing index or services index for August. The Federal Reserve will issue its beige book of regional economic conditions and several Fed presidents will speak about the economy and monetary policy.

In overseas news, the European Central Bank (ECB) meets and will announce its decision on interest rates.

Only a few companies are scheduled to report earnings this week and the most notable include Kroger, Barnes & Noble, Casey’s General Stores and Valspar Corp.

Portfolio Strategy

If the past is any indication, investors are entering a seasonally weak period for stocks as September has historically been the weakest month and October has certainly had its share of volatility. In addition to the August employment report released last Friday, the calendar shows that the month of September has a number of potential market-moving events. The European Central Bank (ECB) meets this week to discuss the possibility of additional stimulus measures to boost economic growth while the Bank of England meets the following week to assess the effects of the recent Brexit vote on the British economy. The Federal Open Market Committee (FOMC) meets on the 20th and 21st of the month to decide whether or not to raise the federal funds rate. While the fed funds futures market is signaling a very low probability to a rate hike, Fed Chair Janet Yellen may have other ideas. The Bank of Japan (BOJ) also meets on these days to discuss whether or not its monetary policy measures are enough to reignite its sluggish economy. The first U.S. presidential debate occurs late in September and it could have an impact on the stock market as well. Finally, the Organization of Petroleum Exporting Countries (OPEC) meets near the end of September and its decisions could affect the price of oil which, in turn, could have an effect on stock prices. With the stock market trading near record highs and projections for economic and earnings growth becoming more optimistic, any disappointment or unforeseen event could cause volatility to return to the market after a relatively quiet summer.