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Stocks ended last week on another strong note as markets surged on the strong possibility that the Fed won’t raise rates this year. For the week, the S&P 500 gained 0.90%, the Dow grew 0.77%, and the NASDAQ rose 1.16%.1
Investors greeted mixed economic data with cheers as it raised hopes that the Federal Reserve will delay hiking rates. We’re back to another round of “bad news is good news” market activity. Investors have exhibited this contrary behavior around key Fed decisions in the past, so it’s no great surprise. Right now, investors are so nervous about rate hikes that they cued into last week’s lackluster data as an indicator that the Fed could delay a rate raise until 2016.
Among the reports that might give the Fed pause was data that showed industrial production slipping for two months in a row, potentially showing that the manufacturing sector is suffering.2 Wall Street economists are also paring back Q3 economic forecasts, expecting to see just 1.7% growth following the second quarter’s strong final reading of 3.9%.3 On the positive side, consumer sentiment rebounded strongly, suggesting that the economy remains strong despite challenges from a strong dollar and weak global growth.4
So far, earnings season has been lackluster. Although we haven’t heard from enough U.S. companies to draw conclusions, reports from heavy-hitters like Wal-Mart [WMT] and Yum Brands [YUM] show that many companies are cautious about growth prospects. Economic developments in China and volatility abroad are making projections difficult, but companies expect challenges to growth to continue.5
This week is light on U.S. economic data, so markets will likely focus on earnings reports and key economic data out of China. Is last week’s rally likely to last? We can hope so, but we’re expecting more volatility as earning season progresses and investors digest fourth-quarter forecasts.
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