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U.S. stocks closed marginally higher on Tuesday on the heels of disappointing housing data, while investors awaited the latest monetary policy decisions from the Federal Reserve and the Bank of Japan.
"You're dealing with three issues," said Rob Bartenstein, CEO of Kestra Private Wealth Services, referring to seasonality, valuations and the Fed. "You've got everybody waiting to see what the Fed is going to do, which I think is nothing."
"We're not hyper-valued, but we're in one of the top four most-valued bull markets of all time," he said. "Valuation alone won't bring down the market, but if we get something unexpected, valuations are going to be under a microscope."
The Dow Jones industrial average rose more than 100 points shortly after the open before closing about 10 points higher, with McDonald's contributing the most gains. The S&P 500 rose less than 0.1 percent after briefly turning negative, with health care leading. The Nasdaq composite advanced 0.1 percent, as the iShares Nasdaq Biotechnology ETF (IBB) rose 1.43 percent.
"I think [the market] is basically treading water ... in advance of what the Fed is going to do," said Tom Siomades, head of Hartford Funds Investment Consulting Group. "I think some of the bond movements we're seeing were in anticipation of what the Fed might say." He added that he does not think the Fed will raise interest rates on Wednesday.
Housing starts in the U.S. came in at an annualized rate of 1.14 million in August, well below the expected 1.19 million. Construction permits fell 0.4 percent to a 1.14 million-unit rate last month.
"It was a bit of a disappointment, but it wasn't detrimental to the housing market," said Peter Cardillo, chief market economist at First Standard Financial. "If you look at the report as a whole, it doesn't point to any trouble."
Housing starts and permits were two of the last data sets released as the Fed began its two-day policy meeting on Tuesday. Market expectations that the Fed will raise interest rates on Wednesday were low. Lindsey Piegza, chief economist at Stifel Fixed Income, said Monday the odds of a rate hike this month are "well under 20 percent," in her view.
"I maintain that Janet Yellen will refrain from adding restrictive measures until at least December. Such inaction does not guarantee a resumption of the rally, for the 'dot plots' for the current and future years could perform as an effective proxy to convey a more hawkish tone at the central bank," Jeremy Klein, chief market strategist at FBN Securities, said in a note to clients.
Fed Chair Janet Yellen is expected to hold a news conference after the central bank releases its policymaking decision. "One of the things I will be watching is what happens with their inflation forecast," said Ira Jersey, senior client portfolio manager at OppenheimerFunds. "If they bring down their core inflation forecast, that's something they're going to regret."
But Adam Sarhan, CEO at Sarhan Capital, said the BOJ's meeting, which began overnight, could overshadow the Fed's decision. "The BOJ is the real wildcard," he said. "If the BOJ takes a not-so-dovish stance, you could see the market fall even if the Fed doesn't raise rates."
There is some talk the Japanese central bank could cut rates further into negative territory, but it could also cut back on purchases of long-dated bonds while continuing to buy short-dated securities. That would have the impact of steepening the yield curve, a positive for banks.
"Whatever the BoJ chooses to do all eyes are on the reaction of the bank stocks in what will be most likely an attempt to steepen the yield curve. It took a 50% decline in the Topix bank stock index from the June 2015 high to the July 2016 low that alarmed many that as much as a central banker wants 2% inflation, destroying your banking system in order to get there is a really stupid idea," Peter Boockvar, chief market analyst at The Lindsey Group, said in a note to clients.
Hartford Funds' Siomades said "Japan is in much more dire straits. A lot of easing they've tried to do has not worked." "They're running out of bonds to buy."
U.S. Treasurys traded mixed, with the two-year note yield traded at 0.77 percent and the benchmark 10-year note yield around 1.69 percent. Meanwhile, the dollar rose slightly against a basket of currencies, with the euro near $1.116 and the yen around 101.7.
"The [bond] market has essentially priced in no move," said Ninh Chung, head of investment strategy and portfolio management at Silicon Valley Bank. "The Fed has been very transparent in signaling its next move."
"If there is more QE from the BOJ, ... then that would decrease the probability of a rate hike. I don't think the Fed moves independently of other central banks."
Investors also kept an eye on oil prices, as U.S. crude briefly fell more than 1 percent after comments from Venezuela indicated the oil market is still oversupplied by 10 percent. WTI erased losses to settle 0.32 percent higher at $43.44 per barrel on news that Colonial Pipeline in Alabama would re-open Wednesday.
U.S. stock futures rose broadly on Tuesday, with Dow futures gaining more than 60 points, while S&P and Nasdaq futures rose 8 points or 14 points, respectively. On Monday, U.S. stocks closed mostly flat.
"Technically, the Dow is below its 50-day moving average. If we can get above that, that could be a vote of confidence," said Sarhan.
The Dow Jones industrial average rose 9.79 points, or 0.05 percent, to close at 18,129.96, with Merck leading advancers and ExxonMobil the top decliner.
The gained 0.64 points, or 0.03 percent, to end at 2,139.76, with health care leading advancers and energy lagging.
The Nasdaq advanced 6.33 points, or 0.12 percent, to 5,241.35.
Advancers were a step ahead of decliners at the New York Stock Exchange, with an exchange volume of 748.31 million and a composite volume of 3.048 billion at the close.
The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 15.7.
Gold futures for December delivery settled 40 cents lower at $1,318.20 per ounce.
—CNBC's Patti Domm contributed to this report.
On tap this week:
*Planner subject to change.
2-day FOMC meeting begins
Earnings: FedEx, KB Home, Adobe Systems
Earnings: General Mills, Red Hat, CarMax, Bed Bath & Beyond
2 p.m. FOMC meeting statement and economic projections
2:30 p.m. Fed Chair Janet Yellen press conference
Earnings: AutoZone, Rite Aid
8:30 a.m. Initial claims
9 a.m. FHFA home prices
10 a.m. Existing home sales
10 a.m. Leading index
Earnings: Finish Line
9:45 a.m. Manufacturing PMI
12 p.m. Philadelphia Fed President Patrick Harker, Atlanta Fed President Dennis Lockhart and Cleveland Fed President Loretta Mester on reinventing communities, transforming economies
12:30 p.m. Dallas Fed President Rob Kaplan speaks at energy forum