NEW YORK U.S. stocks could be in for a jolt of volatility in the week ahead as Congress debates whether to authorize a military strike against Syria and as the Federal Reserve's pivotal decision on winding down its stimulus grows near.
U.S. equity markets have remained on a relatively even keel recently even as others such as U.S. Treasuries and emerging markets have been roiled by worries over what the Fed is likely to do at its meeting later this month and by the Obama administration's campaign to punish Syria for an alleged chemical weapons attack against civilians.
After falling 3.1 percent in August, the benchmark Standard & Poor's 500 .SPX rebounded by 1.4 percent in the first week of September. For the week, the Dow Jones Industrial Average .DJI rose 0.76 percent and the Nasdaq Composite .IXIC gained nearly 2 percent.
The CBOE's Volatility Index, or VIX, a proxy for investor anxiety, fell 7 percent for the week, its largest weekly decline since mid-July. Its closing level of 15.85 on Friday was near a two-week low, and the so-called "fear gauge" is within a point of its average level for the past year, so it is far from elevated.
Still, President Obama's efforts to convince reluctant lawmakers to back his request for a military strike could get the volatility needles rising. A Senate vote is likely to come next week.
"Next week has the potential to see increased volatility and perhaps a jump in the VIX," said Tim Ghriskey, chief investment officer of Solaris Group in Bedford Hills, New York, with $1.5 billion in assets.
The worry for investors would be if a U.S.-led military strike against Syria escalates into a prolonged conflict, Ghriskey said. That could be negative for stocks.
"The market will be very susceptible to rumor," said Quincy Krosby, market strategist at Prudential Financial in Newark, New Jersey. "The worry is that a surgical strike suddenly changes and becomes a bigger, wider event."
The fact that the congressional debate over Syria comes on the effective eve of the Fed's key meeting won't help Wall Street's mood. The central bank's policy-setting committee meets on September 17 and 18 and is expected to announced a reduction, or "tapering," of the pace of its $85 billion a month in bond purchases that have been instrumental in supporting asset prices over the past year. <IDn:L2N0H21YE> The S&P 500 is up 16.1 percent this year.
"If the Fed does taper, it becomes a double whammy," Ghriskey said.
If that weren't enough, the question of just who will lead the Fed after Chairman Ben Bernanke steps down early next year also creates uncertainty for investors, not to mention another possible showdown between the White House and Congress over the federal budget and debt ceiling.
Taken together, these factors could be the mix needed to spur what many strategists argue is a long-overdue pullback in stock prices.
"We're poised for the long-awaited correction," said Margaret Patel, senior portfolio manager at Wells Capital Management. The S&P has not experienced a 10 percent slide, the threshold for a technical correction, in more than two years.
LACK OF DIRECTION
Outflows from stock funds in the past three weeks may be another sign that investors are growing wary of U.S. stocks.
Investors have pulled $15.3 billion out of stock funds in the past three weeks, the most over any comparable stretch since August 2011. About $3 billion was pulled from the SPDR S&P 500 ETF Trust (SPY.P), which tracks the S&P 500, marking the largest outflows from any exchange-traded fund in the weekly period ended September 4.
Those outflows suggest investors are "concerned about the future direction of equity markets," said Jeff Tjornehoj, head of Americas research at Lipper.
"Our sense is just that money is moving onto the sidelines" said Temple of Pioneer Investments.
The week ahead is relatively light by way of economic data, with the biggest scheduled release being retail sales for August, due on Friday. The Reuters consensus forecast calls for an increase of 0.4 percent from July.
The earnings calendar is also thin, with just two notable names on the docket: apparel company Phillips-Van Heusen Corp (PVH.N) on Monday and grocer Kroger Co (KR.N) on Thursday.
(Editing by Ken Wills)
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