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Markets Slide Before Key Fed Meeting - September 15, 2014

| September 15, 2014
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Markets closed last week on a down note - breaking five straight weeks of gains - as investors hedged their bets ahead of a pivotal Federal Reserve Open Market Committee Meeting. For the week, the S&P 500 lost 1.10%, the Dow dropped 0.87%, and the Nasdaq slid 0.33%.[1] After weeks of great performance, markets finally hit pause as investors declined to push markets higher ahead of a big week. Fed decisions have driven a lot of market activity in recent months and the upcoming FOMC meeting is highly anticipated. Analysts are poised to leap on any hint of Fed economists' thinking about the state of the economy and the return to normalized monetary policy.

What will the Fed be looking for? Overall, clues that the U.S. economy is still on the path to sustainable, broad-based growth. So much of what the FOMC does comes down to interpretation and reading the tea leaves; Fed economists are accustomed to delving deeply into the data and making judgments based on cloudy and uncertain data.

One of the biggest variables in the Fed's evaluation of the economy is the labor market. So far, most indicators show that the labor economy is improving, albeit modestly. The August jobs report was grim and showed that job creation slowed over the last three months. Worse, the labor force participation rate was a measly 62.8%, the lowest rate seen since the 1970s.[2]

However, fresh research by a group of Fed economists suggests that declines in labor force participation since the financial crisis - often attributed to discouraged Americans who drop their job searches - may actually be due to the natural aging of the U.S. workforce as boomers move into retirement.[3] If true, this means that the Fed may be able to discard some of their concerns about discouraged workers.

Digging a little deeper, the number of job openings in the U.S. ticked down slightly in July, but is still close to a 13-year high. On the other hand, the pace of hiring hasn't kept up with job openings, indicating that workers may be struggling to retool for new jobs or that employers may not be offering competitive wages.[4] Unfortunately, these are not problems that the Fed can solve, but economists need to factor these issues into their thinking to ensure that they don't take away the training wheels too soon.

There are a couple of decisions that could come out of the FOMC meeting. (1) The Fed could decide to continue steadily trimming back bond purchases as they have at every meeting since the taper began in December. This decision would keep us on track for an October finish. (2) If the economic oracles show that the economy is doing well, the Fed could decide to accelerate the pace of its taper, ending its quantitative easing programs ahead of schedule. While doing so would be a huge vote of confidence for the economy, markets might react badly to the news that the party is ending early. (3) If economic prospects look uncertain, the Fed could decide to pause its taper, keeping bond purchases going until the end of the year.

Whatever decision comes out of the meeting, investors can expect some volatility as markets adjust to the news. Investors will also want to gauge the expected effects of a fresh round of sanctions against Russia, which many analysts worry will dampen growth in Europe.[5] All told, it'll be an informative week and we'll keep you posted.

ECONOMIC CALENDAR:

Monday: Empire State Mfg. Survey, Industrial Production
Tuesday: PPI-FD, Treasury International Capital
Wednesday: Consumer Price Index, Housing Market Index, EIA Petroleum Status Report, FOMC Meeting Announcement, FOMC Forecasts, Chair Press Conference 2:30 PM ET
Thursday: Housing Starts, Jobless Claims, Philadelphia Fed Survey

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

HEADLINES:

Factory output in China drops. Chinese factory production growth fell to the lowest level in six years, stoking fears that the world's second-largest economy might be cooling off. Weak readings in several other sectors increase the probability that China's central bank may undertake additional stimulus.[6]

U.S. retail sales rise in August. Retail sales, which account for about one third of consumer spending, rose broadly last month. While retail sales levels are still below pre-recession numbers, this increase bodes well for future spending and economic growth.[7]

Consumer sentiment hits 14-month high. Friday's report showed that U.S. consumer sentiment rose to the highest level in more than a year, as Americans felt more upbeat about economic conditions. Though Americans still worry about a labor slowdown, they are more optimistic about the future.[8]

Import prices decline. The cost of imports into the U.S. fell by the largest amount in nine months, largely due to a sudden decrease in petroleum prices. While this drop may be short-lived, lower import prices will help keep inflation down and cut Americans a break on imported products.[9]


These are the views of Platinum Advisor Marketing Strategies, LLC, and not necessarily those of the named representative, Broker dealer or Investment Advisor, and should not be construed as investment advice. Neither the named representative nor the named Broker dealer or Investment Advisor gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.


Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

Diversification does not guarantee profit nor is it guaranteed to protect assets.

The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The DJIA was invented by Charles Dow back in 1896.

The Nasdaq Composite is an index of the common stocks and similar securities listed on the NASDAQ stock market and is considered a broad indicator of the performance of stocks of technology companies and growth companies.

The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indexes from Europe, Australia and Southeast Asia.

The Dow Jones Corporate Bond Index is a 96-bond index designed to represent the market performance, on a total-return basis, of investment-grade bonds issued by leading U.S. companies. Bonds are equally weighted by maturity cell, industry sector, and the overall index.

The S&P/Case-Shiller Home Price Indices are the leading measures of U.S. residential real estate prices, tracking changes in the value of residential real estate. The index is made up of measures of real estate prices in 20 cities and weighted to produce the index.

The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

Google Finance is the source for any reference to the performance of an index between two specific periods.

Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

Past performance does not guarantee future results.

You cannot invest directly in an index.

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Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors.

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  1. http://goo.gl/Ylu4k9
  2. http://www.investing.com/analysis/what-the-worst-jobs-report-of-the-year-really-tells-us-225722
  3. http://www.reuters.com/article/2014/09/12/us-usa-fed-workforce-idUSKBN0H62NF20140912
  4. http://abcnews.go.com/Business/wireStory/us-job-openings-13-year-high-hiring-rises-25376006
  5. http://www.cnbc.com/id/101997089
  6. http://www.cnbc.com/id/101994640
  7. http://www.reuters.com/article/2014/09/12/us-retail-sales-idUSKBN0H71DF20140912
  8. http://www.reuters.com/article/2014/09/12/us-usa-economy-consumersentiment-idUSKBN0H71LR20140912
  9. http://www.reuters.com/article/2014/09/12/us-usa-economy-importprices-idUSKBN0H71EQ20140912
  10. http://www.realsimple.com/food-recipes/browse-all-recipes/eggplant-rollatini-00100000075561/index.html
  11. http://www.irs.gov/uac/Five-Easy-Ways-to-Spot-a-Scam-Phone-Call
  12. http://www.golftipsmag.com/instruction/full-swing/quick-tips/dont-spill-the-dishes.html#.VBU2EGSSxt8
  13. http://blog.aarp.org/2014/09/11/pharmacies-may-soon-be-able-to-take-back-old-drugs/
  14. http://www.nature.org/greenliving/gogreen/everydayenvironmentalist/dont-hike-with-pests.xml
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