Equities enjoyed a strong week, despite the rally’s slowdown on Friday. The S&P 500 Index finished with a 3.3 percent gain on the week, while the Russell 2000 Index rallied 4.6 percent. The Dow Jones Industrial Average advanced a healthy 3.7 percent and the Nasdaq saw a smaller gain of 2.6 percent.
The Federal Reserve’s most recent meeting had the financial media and speculators interpreting their statements antithetically; in the headlines a dovish Federal Reserve is unlikely to raise rates in the near-term, but looking at the futures market, where speculators place bets on interest rates, the probability of rate hikes in January or March actually increased. On Friday, the odds of a January rate hike were at 52 percent, with March at 61 percent. The yield on the 10-year Treasury also rallied during the week.
Fed officials discussed ending reinvestment of principle as bonds purchased during quantitative easing come due. The Fed has said this would commence sometime after, or concurrent with, an interest rate increase. This signals that a rate hike remains at the forefront of Fed policy considerations.
The energy sector also witnessed healthy returns. Crude oil started the week near $45 a barrel and finished near $50, propelling SPDR Energy (XLE) to an 8.7 percent gain. Fundamentals may have played a small role in the move, but short-covering and statements by OPEC Secretary-General El-Badri were the primary reasons for the advance. El-Badri also indicated that OPEC sees anticipates demand rising in the next year. Coupled with reduced investment in the wake of falling prices, a rebound in oil prices is expected by the oil cartel.
Emerging markets and their currencies advanced along with commodities. iShares MSCI Emerging Markets (EEM) climbed 6.2 percent on the week. Related industrial stocks also revived, including Caterpillar (CAT), which helped the Dow outperform over the week. Earnings reports during the week were not positive on China though, with both Alcoa (AA) and Yum Brands (YUM) reporting weakness in the world’s second largest economy. China was on vacation for most of the week and when it opened on Thursday it played catch up with global markets.
The overall earnings picture was a bit disappointing. Aside from misses by AA, YUM and Monsanto (MON), earnings estimates for MetLife (MET), Goldman Sachs (GS) and Morgan Stanley (MS) were lowered ahead of their reports coming over the weeks ahead.
Economic data was light as another drop in jobless claims brought levels to numbers last seen in the early 1970s. Wholesale inventories increased 0.1 percent in August, but that caused the Atlanta Federal Reserve’s GDP Now model to shave 0.1 percent off its third quarter growth estimate, taking the current estimate to 1.0 percent.