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Looking Ahead for week of the Week of Sept 7-11
Stock Market

Bear gone fishin', mermaids missin'

Got to get to the bottom of this

- Widespread Panic

The bears returned in force this week, leaving investors fishing for the market's bottom. The fuel for the move lower was provided by uncertainty surrounding the Federal Reserve and the Chinese economy. A mid-week respite from international volatility was a temporary tourniquet for equities, but the sell-off resumed on the heels of Friday's non-farm payroll report. The economy added fewer jobs than expected, but the unemployment rate ticked down to 5.1%, the lowest level since 2008. In addition, the previous two months reports were revised modestly higher.

The employment landscape, together with other recent releases, suggests domestic data is trending in a positive direction. Tuesday's Beige Book release showed growth in 11 of the 12 Fed regions, led by gains in housing and the auto industry. PMI numbers on Thursday showed the services sector, which makes up 90% of the U.S. economy, is growing faster than expected. Given this trend, Richmond Fed-head Jeffrey Lacker declared that "it is time to end the era of zero interest rates" in a Friday-morning speech aptly titled "The Case against Further Delay." Lacker's hawkish sentiment followed the Fed's Jackson Hole summit, in which Vice Chairman Stanley Fisher said international volatility won't necessarily prevent a spike in rates in 2015. Traders are currently pricing in a 36% chance of a rate hike in September, up from 26% before the jobs data. The likelihood for a move higher before the end of the year is currently at 57%.

The specter of higher rates isn't the only headwind for U.S. markets. Disappointing PMI numbers out of China got the week off to a rough start, casting further aspersions upon the emerging-market growth story. Volatility eased, however, as the mainland market took a two-day hiatus to celebrate the end of World War II. Bourses in the Eurozone temporarily moved higher on Thursday after European Central Bank (ECB) President Mario Draghi pledged further quantitative easing in an attempt to stave off deflationary concerns in the region. Following the trend in the U.S., the gains were fleeting, as the Euro Stoxx 600 was poised to lose more than 3% in Friday's session. The worst performer of the major indexes was Japan's Nikkei, which tumbled 7% on the week as a strengthening yen paints a negative picture for exporters.

As of Friday's market open, the major averages in the U.S. were poised to give back more than 2% of their value ahead of the holiday weekend. The health care sector was the laggard this week while telecom stocks have been the most resilient. In bond land, the Treasury curve flattened with yields on the benchmark 10-year note settling around 2.14%. Outsized volatility has gripped the commodity complex, as oil prices have experienced wild swings. Optimism over a possible OPEC production cut was tempered by EIA data that showed the sharpest hike in domestic crude inventories in four months. COMEX gold was 1.5% lower for the week to $1116.40 at Friday's open. In forex, the greenback gained against the euro and emerging markets but lost ground to the yen.

Looking Ahead
The economic calendar is relatively light in the holiday-shortened week. It's the calm before the storm though, as the Federal Reserve's Sept. 16-17 interest rate decision inches closer. Fed speak will be limited to a Wednesday morning speech from Minneapolis Regional President Narayana Kocherlakota on monetary policy. On the data front, Friday's inflation reading is expected to reveal a mild 0.1% decrease in the headline producer price number after experiencing a 0.2% increase in July. Ex food and energy, analysts are looking for a 0.1% advance. Also on Friday, the University of Michigan consumer sentiment release will likely show that optimism remained at a three-month low amid the recent stock market turbulence.

Investors may be paying closer attention to the deliberations overseas. Chinese export numbers on Tuesday will be scrutinized to see whether the surprise yuan devaluation was able to pay immediate dividends for the world's second largest economy. Revisions to second-quarter GDP numbers in Japan will also be released on Tuesday. Economists are forecasting a mild downward revision from the previously reported 1.6% contraction. A meeting of European Central Bank finance ministers on Wednesday may yield more details concerning the fresh round of quantitative easing announced by Mario Draghi. The Bank of England will mull over asset purchase levels and interest rates on Thursday. The decision arrives a day after Queen Elizabeth II becomes the longest reigning monarch in the Union Jack's history. The BOE is expected to follow her lead and stick to the status quo.

In corporate news, Apple (AAPL, $110.37) is expected to unveil its latest iPhone iteration at an event in San Francisco. Rumors are also swirling around a new Apple TV device and possible information concerning the company's anticipated foray into the original content landscape. Earnings reports are scant, with Kroger (KR, $34.57) representing the only S&P 500 company to post quarterly confessions.

Fargo Investment Institute (WFII)
The WFII Global Investment Strategy (GIS) team advice during this period of volatility is to act, but don't overreact to the market correction. In its opinion, recent activity is more a function of a shift in sentiment due to uncertainty over Fed monetary policy, weakening commodity prices, and recent geopolitical events, than a change in the fundamental outlook for the global economy. GIS stands by its call to use periods of weakness as a buying opportunity. To reflect this stance, it recently made a tactical tilt to take advantage of market volatility. Specifically GIS removed 2% out of high-yield fixed income (taking it to underweight) and reallocated it into U.S. large-cap equities. GIS believes balance sheets of big companies are well-capitalized, which should allow them to navigate through economic and market uncertainties. It maintains a year-end S&P 500 target of 2150-2250 and sees the index reaching new highs in 2016. The reduction to high yield was based on expectations for continued volatility due to liquidity concerns driven by lower commodity prices.

Despite the volatility impacting markets overseas, GIS continues to be optimistic on international developed equity markets. It believes the recent weakness has made valuation more attractive as Europe's economy stabilizes. Expectations for emerging-market stocks are less sanguine. Given the looming Fed rate increase and falling commodity prices, GIS recommends a neutral allocation.

For fixed-income, GIS adjusted its sector weightings. Specifically, it initiated an overweight to investment-grade corporate debt. The change looks to take advantage of the spread widening this year relative to U.S. Treasuries. GIS also made the shift as a way to position portfolios to potentially benefit from additional yield in the asset class that should offer better liquidity and outperformance. In addition, it is consistent with the aforementioned underweight on high-yield and recommendation to move up in credit quality. GIS reiterates an underweight U.S. Treasuries and to maintain neutral exposure to the remaining fixed income sectors. To mitigate the possible impact of the Fed raising rates on portfolios, GIS advises staying short of benchmark duration targets.

- Dan Wanstreet, Assistant Vice President – Markets & Product Strategy

- Dan Meehan, First Vice President – Markets & Product Strategy

Wells Fargo Advisors

This information is obtained from sources and data considered to be reliable, but its accuracy and completeness is not guaranteed by Wells Fargo Advisors. Wells Fargo Advisors is the trade name used by two separate registered broker-dealers: Wells Fargo Advisors, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, non-bank affiliates of Wells Fargo & Company. CAR#: 0915-01204


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