The Markets This Week
WITH THREE DAYS TO GO, STOCKS could finish September with their seventh consecutive monthly gain. But last week offered a preview of the chillier season to come.
The dramatic turn, and the start of the market's three-day slide, came on Wednesday, after Federal Reserve Chairman Ben Bernanke acknowledged the strengthening economy but promised not to mess with it by raising interest rates just yet. The Dow Jones Industrial Average climbed as high as 9918, but the haste and efficiency with which it then shed 177 points quickened pulses. Is this buyer exhaustion? Have stocks already priced in this utopia of economic recovery and cooperative rates?
Such doubt, and an awareness that stocks have already run up 59% since March, helped check investors' growing taste for risk. Treasuries rallied, the dollar ticked up against the euro, and defensive consumer-staples stocks shone. The Dow ended the week down 155, or 1.6%, to 9665. The Standard & Poor's 500 surrendered 24, or 2.2%, to 1044; it is still up 54% since March 9, but off 14% over the past year. Research in Motion 's (ticker: RIMM) disappointing forecast hurt technology stocks, and the Nasdaq Composite Index lost 42, or 2%, to 2091, while the Russell 2000 slid 19, or 3.1%, to 599.
Stocks' third loss in 11 weeks made out-of-practice bears giddier than usual, but what it really offered was a glimpse into investors' chief fear. The Fed said it will slow its buying of mortgage securities, partly to stretch this supportive regime through to March, but any hint of the withdrawal of benevolence is enough to spook the market.
"If a strong recovery becomes consensus, investors may conclude the stimuli are no longer appropriate, and start pricing in tightening," says one Wall Street head of research. That could happen if an unemployment rate at 9.7% eases markedly, or if the benchmark 10-year Treasury yield begins to rise with economic prospects.
One well known Wall Street firm recommends that investors favor equities over corporate credit, in part because equities are now more sensitive to GDP growth, but says "markets are more vulnerable to policy tightening than to growth disappointment."
If that were so, last week's middling economic report card should extend the federal coddle. Existing home sales fell 2.7% in August to snap a string of four increases, and orders for big-ticket items fell 2.4%, although analysts say these setbacks aren't severe enough to disrupt the improving trend. Unemployment claims shrank, General Mills (GIS) raised its 2010 outlook, and battery-maker A123 Systems (AONE) made its splashy NASDAQ debut.
Stocks' labored progress was bogged down further by a supply onslaught. Between Monday and Thursday, companies sold shares in some 41 deals to raise $9.4 billion, roughly 2.5 times the average weekly pace this year, says JPMorgan.
If the S&P 500 ends September above 1021, it will mark only the 16th time since 1928 that stocks have rallied for seven straight months. Since World War II, such streaks rarely persist for more than another month or two — so a pullback is widely anticipated. But the market-mending suggested by prolonged buying also tends to continue, with stocks notching gains averaging 4.2% after three months and 6.4% after six (Source: Barrons Online).
The dramatic turn, and the start of the market's three-day slide, came on Wednesday, after Federal Reserve Chairman Ben Bernanke acknowledged the strengthening economy but promised not to mess with it by raising interest rates just yet. The Dow Jones Industrial Average climbed as high as 9918, but the haste and efficiency with which it then shed 177 points quickened pulses. Is this buyer exhaustion? Have stocks already priced in this utopia of economic recovery and cooperative rates?
Such doubt, and an awareness that stocks have already run up 59% since March, helped check investors' growing taste for risk. Treasuries rallied, the dollar ticked up against the euro, and defensive consumer-staples stocks shone. The Dow ended the week down 155, or 1.6%, to 9665. The Standard & Poor's 500 surrendered 24, or 2.2%, to 1044; it is still up 54% since March 9, but off 14% over the past year. Research in Motion 's (ticker: RIMM) disappointing forecast hurt technology stocks, and the Nasdaq Composite Index lost 42, or 2%, to 2091, while the Russell 2000 slid 19, or 3.1%, to 599.
Stocks' third loss in 11 weeks made out-of-practice bears giddier than usual, but what it really offered was a glimpse into investors' chief fear. The Fed said it will slow its buying of mortgage securities, partly to stretch this supportive regime through to March, but any hint of the withdrawal of benevolence is enough to spook the market.
"If a strong recovery becomes consensus, investors may conclude the stimuli are no longer appropriate, and start pricing in tightening," says one Wall Street head of research. That could happen if an unemployment rate at 9.7% eases markedly, or if the benchmark 10-year Treasury yield begins to rise with economic prospects.
One well known Wall Street firm recommends that investors favor equities over corporate credit, in part because equities are now more sensitive to GDP growth, but says "markets are more vulnerable to policy tightening than to growth disappointment."
If that were so, last week's middling economic report card should extend the federal coddle. Existing home sales fell 2.7% in August to snap a string of four increases, and orders for big-ticket items fell 2.4%, although analysts say these setbacks aren't severe enough to disrupt the improving trend. Unemployment claims shrank, General Mills (GIS) raised its 2010 outlook, and battery-maker A123 Systems (AONE) made its splashy NASDAQ debut.
Stocks' labored progress was bogged down further by a supply onslaught. Between Monday and Thursday, companies sold shares in some 41 deals to raise $9.4 billion, roughly 2.5 times the average weekly pace this year, says JPMorgan.
If the S&P 500 ends September above 1021, it will mark only the 16th time since 1928 that stocks have rallied for seven straight months. Since World War II, such streaks rarely persist for more than another month or two — so a pullback is widely anticipated. But the market-mending suggested by prolonged buying also tends to continue, with stocks notching gains averaging 4.2% after three months and 6.4% after six (Source: Barrons Online).
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