The Nitty Gritty Details
U.S. stocks opened lower on the first trading day of the fourth quarter as stocks attempt to reverse their recent slide. Greece said it will miss its deficit targets for the year, causing doubts to linger over whether it will secure its next round of aid and prolong what most believe is an inevitable default. Markets will watch for any developments out of Euro area discussions involving Greece resolution and leveraging the European Financial Stability Facility (EFSF). European markets are about 2% lower in mid-day trading overseas, led lower by the banks again, while the Nikkei and Hang Seng closed sharply lower. Commodities are broadly lower and the dollar higher, although gold and silver are bucking the trend with solid advances on safe-haven buying. Livestock is seeing gains as well.
Looking back at Friday, a rough third quarter came to a merciless end. Stocks fell sharply Friday on the last day of the quarter as favorable prospects for another round of rescue funds for Greece and likely approval of an expansion of the EFSF were not enough to reverse the downward momentum. Europe’s woes on top of concerns about a marked slowdown in China and weak monthly personal income data sealed the eighth weekly loss out of the past ten despite some resilient U.S. economic data, the latest being the Chicago PMI. Friday’s losses capped a quarterly loss of 14% for the S&P 500, the worst quarter since 2008. All 10 sectors fell at least 1% on the session, with Financials and Materials – the biggest losers for the quarter – being hit hardest. Commodities fell along with stocks – the CRB Commodity Index lost 2.5%, led lower by copper, crude, corn and wheat.
Around our financial planning services firm this morning, we were discussing four items that we thought would be of particular interest to our readers this week:
1. Data should trump policy this week. Over the next week, financial markets will digest key reports for September on consumer spending (vehicle sales for September, chain store sales), manufacturing (ISM), the service sector (non-manufacturing ISM), housing and construction and the labor market (ADP, Challenger and government jobs reports). With the market having already priced in a recession, the bar is relatively low for this set of data.
2. Although data is likely to dominate this week, policy information isn’t going away. On the monetary policy front, Fed Chairman Bernanke is set to deliver testimony before the Joint Economic Committee of Congress on Tuesday, the very same day that Congressman Ron Paul will hold a hearing entitled “Auditing the Fed.” In addition, there are six other public appearances by Fed officials on the docket this week. It is also a busy week for monetary policy outside the United States. The Reserve Bank of Australia (RBA), the Bank of England (BOE), the European Central Bank (ECB), the Bank of Japan (BOJ) and the central banks of Peru, Poland, Serbia, Kenya and Ghana all meet this week to set policy.
3. October is historically the month that typically ends stock market slides as the market begins to reverse declines. Also, over the past 50 years, when stocks post a double-digit decline in a quarter they typically rebound 6% during the following quarter. Of the 16 times the S&P 500 has registered a double-digit loss during a quarter, 13 of those times – or over 80% of the time – the following quarter posted a gain and those gains averaged 9%.
4. Investors have sharply discounted the odds of a positive surprise, or “pink swan” event. A “black swan” event – a rare, unexpected event that has a major impact – is most often referred to as something with negative consequences. While investors fret over black swans, there are a number of potential pink swan events that could take place and grab investors’ attention in the weeks ahead. While they may be hard to see at the moment, there are potential “pink swans” that could result in stronger-than-expected growth over the longer-term: a clear path to U.S. fiscal sustainability could emerge in the next few years, China’s consumers could begin to become a powerful consumer force and drive global demand growth, and new technologies could greatly improve resource productivity.
I would gladly answer any questions you may have. You can email me here or call me at (205) 989-3498.
Senior Vice President
Note: The opinions voiced in this material are for general information and are not intended to be specific advice. Any indices such as the S & P 500 can’t be invested into directly. Past performance is no assurance of a future result.
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