The equity markets moved higher again last week with a late surge on Friday. Earlier in the week stocks were anchored by economic reports that showed the economy potentially breaking out on the upside. This led to concerns that the Federal Reserve would act sooner than mid-2015 to adjust rates higher. This notion quickly dissolved with the August Employment Report that was much weaker than expected. Stocks were also supported by new actions by the European Central Bank (ECB) to revive the Eurozone’s economy.

The ECB took short-term rates deeper into negative territory and initiated a program to purchase asset-backed securities. The move prompted interest rates to plunge with the yield on German 10-year paper to below 1.0% and Spanish 10-year yields to drop to 2.0%, the lowest on record. This prompted inflows into U.S. securities where yields are much higher and triggered another rally in the dollar. The chain of events late last week reduces the odds that the Fed will raise interest rates sooner than mid-2015, which is the consensus estimate.

Historically, cyclical bull markets do not get into significant trouble unless interest rates begin to rise appreciably or investors turn extremely optimistic. Considering that interest rates are higher nearly everywhere in the world, the pressure on U.S. interest rates is expected to remain to the downside.

Recent data on sentiment show an usually high demand for put options continues despite the S&P 500 hitting new record highs. This is very unusual and suggests too many are looking for an important market peak. Using contrary opinion, the path of least resistance is expected to remain to the upside. The two largest concerns very near-term are the strong dollar’s impact on earnings for U.S. companies and the weak seasonal period in front of the November elections.

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Article provided by Robert W. Baird & Co. with the authorization of its author for Evan Guido, Vice President, Financial Advisor at the Sarasota office of Robert W. Baird & Co., member SIPC. The opinions expressed are subject to change, are not a complete analysis of every material fact and the information is not guaranteed to be accurate. 

Evan R. Guido

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