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Stocks close higher on favorable economic data

I own last year’s top performing funds. Unfortunately, I bought them this year. – Anonymous

Maybe the month of September isn’t so scary after all. Since 1950, the worst month of the year for stock performance has been September, with an average negative total return. Although we have a long way to go before the month is over, the stock market started off on the right foot last week with a gain of 1.4%. For the most part, the economic data last week was positive, even though the most closely-watched piece of data, the employment report, was disappointing. On the surface, an increase of 169,000 new jobs and a decline in the unemployment rate to 7.3% from 7.4% seemed encouraging. However, upon closer examination, the drop in the unemployment rate was primarily due to a decrease in the labor participation rate to 63%, a level not seen since August 1978. A growing number of people have simply given up looking for work. To make matters worse, the number of jobs created in June and July was revised lower by 74,000, which called into question the strength of the economy and the jobs recovery. This weaker-than-expected report is the last major economic release before the Federal Reserve Open Market Committee meeting on Sept. 17th and 18th that will presumably decide the fate of its massive stimulus program. By all indications, the soft jobs report coupled with higher mortgage rates, debt ceiling jitters, possible military conflict in Syria and questionable retail sales, all seem to support either very limited Fed tapering or postponement altogether until the economy strengthens enough to stand on its own.

Last Week

While the employment report on Friday was the most anticipated release last week, there were other announcements that were made that caused stocks to rally. Purchasing Managers Index (PMI) reports that measure the strength of manufacturing were very favorable in China, Europe and the U.S., indicating that the pace of manufacturing was accelerating. Furthermore, General Motors, Ford and Chrysler all reported strong automobile sales for the month of August. There also was optimism about Apple, which is scheduled to unveil its latest iPhone models next week, as well as speculation that it may launch the iPhone with China Mobile, one of the world’s largest wireless carriers. Another good sign for stocks was the announcement of Microsoft’s deal to acquire Nokia’s mobile-phone business for $7 billion and Verizon’s deal with Vodafone to acquire its stake in Verizon Wireless for $130 billion.

The Federal Reserve’s assessment of the state of the economy for July and August, the Beige Book, was released and showed that economic growth was “modest to moderate” as consumer spending throughout most Fed districts rose on strong sales for cars and housing items. Home sales also registered strong gains despite higher mortgage rates.

For the week, the Dow Jones Industrial Average rose 112 points or 0.8% to finish the week at 14,923. The S&P 500 climbed 22 points or 1.4% to end the week at 1,655 and the technology-laden Nasdaq Composite index gained 70 points or 2% to close the week at 3,660.

This Week

With the all-important jobs report in the rear view mirror, the weekly initial jobless claims number on Thursday of this week could take on added significance, especially since it precedes the Fed meeting. Jobless claims last week fell 9,000 and the four-week average for claims fell to the lowest level since October 2007, a hopeful sign for the economy. Also on tap this week is the August Producer Price Index, which is expected to rise just 0.1%, another indication that inflation continues to be benign. And retail sales for August will be released on Friday with economists expecting them to increase by 0.4%, an increase over the prior period.

While Congress reconvenes on Monday and will likely address the Syrian situation first, President Obama will address the American people on Tuesday to make the case for air strikes against Syria. He will have to be very persuasive as the vast majority of American people are against any military involvement in Syria. And lest we not forget, Wednesday marks the twelfth anniversary of the 9/11 attacks on the World Trade Center and the Pentagon.

Portfolio Strategy

After falling 4.6% from its peak on August 2nd, 2013, it was encouraging to see the S&P 500 stabilize and close the week on a positive note with a modest gain. Many people were expecting a correction of that magnitude and the stock market may well have put in a short-term bottom for now. While nervousness over Syria contributed to part of the correction in stock prices, the focus continues to be on the economy, interest rates and the Fed meeting this week. The drumbeat of war always raises the level of anxiety, but knowing that markets have always rebounded after military action has begun should be somewhat reassuring to investors. The next hurdle will be the Fed meeting and a token reduction only in the Treasury portion of the bond-buying program might be the best solution. This would placate those against quantitative easing and the size of the Fed balance sheet. It also would continue to help the mortgage market, where higher rates are just beginning to have a negative effect on home sales and could adversely affect automobile sales as well. Both of these sectors have been pillars of strength in the economy up to this point.

With uncertainty over monetary policy, debt ceiling concerns, economic growth, interest rates and Mid-East tensions, investors have a lot to worry about and should expect volatility in the months ahead. In an environment such as this, it’s important for investors to remain disciplined and have a portfolio allocation that they are comfortable with for the long-term. We still remain constructive on the stock market and believe that patience will be rewarded. While we are concerned about rising interest rates, fixed income portfolios have been constructed with short-to-intermediate maturities to reduce overall risk and lessen any bond losses. Most strategists are of the opinion that the 10-year Treasury yield at year-end will be about 3.00%, slightly above where the yield is now.