Dollars and Sense: A market breather is better than a market correction

Marking time. We’ve not seen a lot of movement up or down in the Dow or the S&P 500 in the past three weeks. The fact that we’re near record highs is taking some of the sting out of the stagnation. If you’ve got to stall out anywhere, you want to stall out where you’ve got a view, rather than down it a ditch. A week ago Friday the S&P 500 set its 33rd record high close for the year. So it’s understandable that the markets aren’t continuing a rush upward, and lots of analysts think this three-week market breather, rather than some sort of correction, is a sign of strength.

Waiting for guidance. What are the markets waiting for to move again, either up or down? Traders are waiting for news about the timing and amount of interest rate hikes. Until recently, conventional wisdom said the Federal Reserve Bank would bump up rates in the middle of next year, but prognosticators keep moving that date forward. The Fed meets this week to discuss possible changes to its monetary policy. An interest rate hike likely will have a dampening effect on stocks because not only will it become more expensive to buy stocks with borrowed money, higher interest rates could start to make other investment classes look more attractive.

M&A continues. We did get some corporate finance news over the past week or so. Sweden’s Electrolux agreed to buy GE Appliances for $3.3 billion. General Mills said it would acquire Annie’s, a producer of organic foods, for about $820 million. Neither of these transactions are particularly large by Wall Street standards, but they did continue a string of merger and acquisition activity we’ve been talking about for a few weeks. Most analysts generally think these deals are a good sign that corporations are putting cash on their balance sheets back to work. Also making headlines this week: Yahoo shares rose about 4 percent after China’s e-commerce site Alibaba filed for its initial public offering. Yahoo owns a 23 percent stake in Alibaba.

Economic reports. It was generally a light week for economic reports. The news was mixed, which likely contributed to the lack of direction in the markets. The National Federation of Independent Business said its index of small-business optimism was higher last month, with the mostly small business owners who make up that organization saying they expect conditions to improve in coming months. Thursday’s jobs report was weak, with first time claims for unemployment edging up again, back over 300,000. We got a report on Friday saying August retail sales bounced back after July’s weak report. That was good news, but a report that merely meets expectations doesn’t usually move the markets much, and in fact the markets were down on Friday.

The week ahead. We’ll see a somewhat busier week for economic reports, and a few fairly significant announcements. We’ll get the consumer price index number on Wednesday. That gives us perhaps our best peek at what inflation is doing. Housing starts and building permits come out on Thursday. That’s a good indication of what’s going on in the construction trades and is a leading indicator for retail. And, of course, the Fed meeting we’ve already mentioned. All in all, a lot to watch this week.