Market Perspective for September 12, 2014

The indexes lost ground today, pulling their weekly performance into negative territory. Overall, the S&P 500 Index lost 1.10 percent on the week, while the Dow Jones Industrial Average dropped 0.87 percent. The Russell 2000 retreated 0.81percent.  The Nasdaq, which has been the strongest index recently, lost a modest 0.33 percent.

Apple (AAPL) unveiled its anticipated watch this week. Shares of Apple rallied strongly ahead of the news and then tumbled as traders sold the stock. Shares recovered later in the week and went on to finish higher. Since Apple is the largest stock in both the S&P 500 Index and the Nasdaq, it’s movement up, down and then up again helped make for a mildly choppy week for stocks.

The real action this week was in the currency markets. The Japanese yen broke to a new 52-week low versus the U.S. dollar and then continued falling. The euro finally stabilized after a scare earlier in the week, when traders saw a poll that showed the Scottish independence vote leaning towards the yes camp. The news weighed even more on the British pound, which for obvious reasons is first in line for any effects should Scotland decide to leave the UK next week.

The Australian dollar also fell this week, as part of a wider drop in industrial commodities. Iron ore and copper came under pressure as concerns about a slowdown in China picked up. The stronger U.S. dollar is also weighing on commodities. Between the losses in currency and commodity markets, the U.S. dollar is having one of its best streaks in almost two decades. That’s keeping U.S. assets attractive and drawing in investors from the developed world

The effects of the Federal Reserve’s taper may finally be hitting the bond markets though. Short-term yields have been increasing and long-term yields joined them this week. Junk bonds are also under pressure again after barely making a new high in late August. It hasn’t been a big or noisy move, but interest rates are quietly rising in the U.S., though mostly concentrated in shorter-term bonds. Europe had been helping to pull rates lower, since some of its sovereign bond yields are in negative territory, but the impact may be limited moving forward.

As we approach the mid-point of the month and look ahead to October, the U.S. remains the relatively attractive destination for investors. The economy is much stronger than Europe or Japan. Bond yields are significantly higher, the currency is strengthening and the stock market continues to perform well. The Fed’s exit from quantitative easing should support the dollar, while the European Central Bank and Bank of Japan move to weaken their currencies should work in concert to strengthen the dollar. Interest rates remain low and the very low rates in Europe could help keep domestic bond yields subdued, even though GDP growth is picking up. Stocks performance may be a bit more tempered moving forward, but the bull market still has a lot of factors working in its favor.

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