This column was originally published on RealMoney on Oct. 5 at 1:59 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.

There has been a sudden weakening of the stock market over the past few days. It appears to be related to worries about interest rates, which have escalated over the past week following numerous warnings from Federal Reserve officials about the likelihood of continued rate increases. This is apparent in the behavior of various sectors of the stock market and other asset classes.

Also contributing to the slide was Wednesday's release of the Institute for Supply Management's monthly index for the nonmanufacturing sector. The index, which was much weaker than expected, suggests that the recent signs of resilience in the economy were largely confined to manufacturing -- an unfavorable mix because of its implications for continued job growth and the chances for a sustained expansion (more on this later).

Homebuilders Weak

Evidence that Wednesday's stock market weakness relates at least partly to concerns about interest rates can be found in the slide in homebuilders' shares. Pressures are coming to bear on the sector for the many reasons I pointed out a few days ago . These include the Fed's continued rate hikes and the pressure the Fed is putting on bankers to tighten lending standards.

Other factors hurting housing include the 14-year low in housing affordability; slowing price gains and reports of price declines (this is reducing speculative activity); surging inventories; weakened consumer confidence; and rising assessed values (which raise the cost of ownership via higher real estate taxes and insurance costs). Weakness in housing could have a large impact on the economy.

Loss of Leadership

In addition to the weakness in homebuilders' shares, the two-day decline in oil and oil services stocks has left investors with scant leadership. Given the lack of confidence in other sectors, liquidations of shares in these leading groups leaves the overall market weaker, as there is no rotation occurring.

Emerging Markets

Emerging markets have been weak as well, with Brazilian shares down almost 3% and Russian down over 3% (using the Templeton Russia Fund as a proxy, a weak opening appears likely Thursday). The emerging markets tend to underperform markets in industrialized countries when the Fed is raising interest rates. This hasn't been the case recently, largely due to the benefits that some of these countries have had from high energy prices.

Nevertheless, the Fed's persistence in its rate-hike campaign and the level to which it now appears headed may be taking the edge off emerging markets. Weakness in emerging markets often spills over into industrialized markets.

Commodity-Based Currencies Weaken

The Australian, Canadian and New Zealand dollars all are lower as of midday Wednesday, perhaps also due in part to the threat of further interest rate hikes. The more the Fed raises interest rates, the less likely it is that commodities will rally. This hurts these so-called commodity-based currencies, as well as basic materials stocks, which were down 2% on the day (using the S&P basic materials index as a gauge).

ISM Reading Is Bad Sign for Employment

The weak ISM nonmanufacturing index reading indicates that the recent signs of resilience in the U.S. economy have been disproportionately skewed toward the factory sector. In other words, data such as durable goods orders and the ISM index sent a misleading signal with respect to the economy, and it now appears that there has been an unfavorable shift in the composition of the growth in the economy toward the factory sector and away from the services sector.

A typical spread between the ISM's nonmanufacturing index and its factory index is about 5 points; it was 7 points over the past year. Now the nonmanufacturing index is below the factory index.

This is unfavorable because of its implications for job growth: Of the 133 million people employed in the U.S., 110 million work in the services sector. If the factory sector is grabbing more of the spending dollars in the U.S., it will hurt the services sector, where most jobs are created.

That said, the concerns that investors are expressing with respect to the ISM index are likely excessive. Some of the recent shift to factory-related activity relates to the automakers' employee-discount programs, which grabbed a large share of consumer spending. Car sales are now cooling, so money will skew back toward the services sector.

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Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.

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