State of the Stock Market Analysis for the Week Ending September 27th, 2015 (Fed Rate Hike Still Imminent 09-27-2015)Stock picking service

The Dow may have closed out Friday up more than 100 points, but the Nasdaq was down a percentage point for the day and the S&P 500 finished modestly in the red. The Dow received a big boost from sports apparel and shoemaker, Nike (NKE), whose shares rallied more than 8%. However, the late-day fade had investors concerned. The early market upward bounce was a plus as we headed into the weekend. But once again, we saw a trailing off on a Friday, which did not help the optimism we saw early in the session. Hard hit were biotech companies, and that helped play into investor pessimism. For the week, the Dow was down 0.4%, the Nasdaq was down 2.9%, while the S&P 500 was down 1.4%.

Janet Yellen gave a great speech Thursday night about the strength of the U.S. economy, and her hawkish comments made it seem like a Federal Reserve rate hike was on the way. The news of U.S. GDP being revised upward to 3.9%, versus the expected 3.7%, was a big plus. However, it was not enough to give an “all clear” for the stock market. Despite the solid-looking GDP number, investors retreated on Friday, and it was surprising given the early strength we saw to have the S&P 500 and the Nasdaq finish lower for the day.

Recent news from China regarding its economy and having its leader meeting with President Obama on Friday was a plus, but investors remained unimpressed. All the cards were in place for a vibrant Friday rally, but that was not what we saw in the U.S. stock market. If a positive speech from Janet Yellen is not enough to fire up the stock market, then what is? She said that the U.S. economy is strong and sound and that a rate hike before the end of the year would be prudent and a likely possibility. It would have been preferable to have a 300-point ā€œupā€ day for the Dow following those comments, but that was not to be the case.

So here we are heading toward October with a stock market that still lacks confidence. That is not the way bulls would like to head into October, but it is the situation we will have to deal with. The Fed had a pretty good shot at a quarter point rate hike last week, but it opted to wait. This sent all of those worries forward to a future date, and its late-October meeting is the next possibility. Janet Yellen’s hawkish comments about a rate hike before the end of the year only prolonged the “uncertainty,” which is likely why the stock market reacted so poorly on Friday.

The Federal Reserve is in a tough spot, and it is understandable why it chose not to raise interest rates last week. The problem, made evident by the many critics of the Fed, is that the longer the Fed waits, the more problematic the issue becomes. Remember that we have been warned of a “taper tantrum” once the Fed actually does begin raising rates. So in some ways, you cannot blame the Fed for laying low. China is obviously a big concern, and the Fed does not want to do anything right now to rattle global markets. A rate hike last week might have done just that.

So, if you were Janet Yellen and the Fed, what would you do at this juncture? You have a stock market that has had a 10% or so correction, but do you make it worse by hiking rates by 25 basis points? Or do you just go with the flow and keep things calm, cool and collected? The economic numbers are strong, and there seems no reason to raise rates back from the zero percent level. However, the Fed has made it clear that it wants to “normalize” rates sooner rather than later. The Fed can no longer “lower” rates that are essentially at zero, so the only other policy initiative it has is more QE (Quantitative Easing) programs if anything goes wrong.

This is where we are, and hats off to any Fed Heads, who might have an answer. If the stock market were driving higher on all cylinders it would be a different debate, but the stock market has hit some sort of speed bump, and investors are concerned. It is also that historical time of year when the stock market gets a little nutty, which is definitely something to keep in mind as we head into October. This was a tough summer for the stock market, and August was difficult to say the least. This week’s weakness was quite disappointing for the bulls, and we are hoping for some clarity and a bounce in the week ahead.

Earnings season is right around the corner, so if the news from Nike is any indication, then maybe we will see some upside surprises. Nike’s revenue in China was strong, so maybe the fears of a global GDP slowdown are unfounded. The price of oil has stabilized and was actually up about 1% on Friday, which helps alleviate a bit of the fear of a global GDP slowdown. The Fed will remain “data driven,” so maybe we can continue to see enough strong data to put this stock market “correction” behind us. The U.S. economy seems sound, and that should be a plus for the stock market in the weeks ahead.

That said, the Gorilla wishes each and all a relaxing weekend and get ready for an interesting and possibly challenging October. It is that time of year when the stock market can be unpredictable, but it also is a time of year that answers many market questions. August and September have been volatile, but maybe October will give way to a much-needed bounce. Again, have a great weekend, and we will be back in action on Monday!

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