MARKET SNAPSHOT: Stock Market Could Test New Highs As Rate Hike Jitters Fade
August 27 2016 - 3:51PM
Dow Jones News
By Sue Chang, MarketWatch
'In the global wide search for yield, U.S. stocks are still
attractive'
The Federal Reserve's top two officials did their best Friday to
convince investors interest rates will likely rise by the end of
the year, waking stock-market bears from hibernation. But the
damage to equities is likely to be minimal once Wall Street regains
its composure.
Fed Chairwoman Janet Yellen said the case for an interest-rate
increase is strengthening
(http://www.marketwatch.com/story/feds-yellen-says-case-for-another-interest-rate-hike-has-strenghtened-2016-08-26),
setting the stage for the central bank to tighten monetary policy
in the coming months.
"In light of the continued solid performance of the labor market
and our outlook for economic activity and inflation, I believe the
case for an increase in the federal-funds rate has strengthened in
recent months," said Yellen.
Fed Vice Chairman Stanley Fischer was more explicit, saying
Yellen's comments were consistent with possibly two rate increases
this year
(http://www.marketwatch.com/story/feds-fischer-yellens-speech-consistent-with-possibility-of-2-interest-rate-hikes-this-year-2016-08-26)--including
a move as early as next month. Yellen and Fischer both stressed
that any policy decision will be dependent on economic data.
That was enough to turn stocks lower, with the S&P 500
finishing the day down 3.43 points at 2,169.04, logging a weekly
drop of 0.7%. The Dow Jones Industrial Average fell 53.01 points to
finish at 18,395.40, off 0.9% for the week. The Nasdaq Composite
bucked the trend to rise 6.71 points to 5,218.92 but the tech-heavy
index still fell 0.4% on the week.
Bullish analysts believe negative sentiment could carry over to
next week as investors continue to dissect and digest the Fed's
verbiage. But any pullback is likely to be short-lived, they
said.
"The market is not vulnerable to anything more than 3%-5% drop
until mid to late September," said Jeffrey Saut, chief investment
strategist at Raymond James. "If we don't follow through on the
downside with vigor, the S&P 500 could test new highs."
Bob Pavlik, chief market strategist at Boston Private Wealth
LLC, was more restrained, noting that selling pressure has mounted
in recent sessions. Still, near-term weakness will be met with
buying interest once the S&P 500 moves toward 2,156 with more
solid support near 2,144 points, he said.
"The economy doesn't need emergency funding," he said. But by
the same token, he said, the data don't support a rate hike -- at
least, not in September.
Even as Yellen sounded bullish on the economy, data point to
soft patches. The gross domestic product grew 1.1% in the second
quarter, while the University of Michigan consumer sentiment index
fell to 89.8 from 90.0 in July.
"Investors should stop looking at every word that comes out of
the Fed," said Karyn Cavanaugh, market strategist at Voya
Investment Management. "A September rate hike won't happen,
regardless of what anyone says."
Amid the absence of high-profile corporate earnings and given
the Fed's emphasis on data, economic indicators will be the main
drivers next week with consumer spending, inflation, and the
all-important August jobs report on tap.
Economists surveyed by MarketWatch estimate the U.S. economy
added 160,000 jobs in August, compared with 255,000 last month
(http://www.marketwatch.com/story/us-gains-292000-jobs-in-july-2016-08-05).
Any number above the consensus is likely to be greeted with
trepidation by market participants wary of the Fed becoming
trigger-happy.
Still, a rise in interest rates might not be the catastrophe
that some investors fear, according to Pavlik. "Twenty-five basis
points is not going to spell the end of the forward movement of the
economy," he said.
A rate increase also won't be the death knell for the market
despite the knee jerk reaction on Friday. "In the global wide
search for yield, U.S. stocks are still attractive," said
Cavanaugh.
(END) Dow Jones Newswires
August 27, 2016 15:36 ET (19:36 GMT)
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