For emphasis, let me repeat last week’s headline statement:
“Do not let emotions overwhelm your sense of reason- avoid panic. The market is encountering a crisis in confidence. This is not the same as a financial crisis or a recession, although, a prolonged crisis of confidence can lead to either if the crisis in confidence lasts long enough. The FED realizes this. The FED has stated several times in the past they will take measures to support the economy. I believe, more probably than not, that the FED will move to support the economy and its actions will be well coordinated with other central banks around the world. This action could be impressive and the stock market’s WOW factor may be big enough to ignite a substantial rebound in stock prices. I am confident you would not want to sell now and miss the rebound if and when the FED acts.”
With the passing of one week, we now know:
1. The FED has indeed taken measures to support the economy by signaling that it would hold short term interest rates at exceptionally low levels through mid-2013.
2. Other central banks around the world acted to support their economies and protect their markets.
Although we cannot assume any guarantees from the actions so far, we can be more optimistic that the key players are attempting to restore confidence. And, we know from history, that when confidence is restored, the equity markets can go up as fast as they went down.
Let me know if you have any additional questions.
Daily Archives: August 18, 2011
Motivational Quote of the Week
“Don’t go through life, grow through life.”
–Eric Butterworth
The Markets This Week
Stocks suffered their fourth loss in five weeks, falling at times toward the threshold that marks the beginning of a new bear market. But the slide was interrupted by bouts of buying, suggesting that the market is groping hard to find a short-term bottom.
The violence between bulls and bears drove the Standard & Poor’s 500 down 6.7% Monday, up 4.7% Tuesday, down 4.4% Wednesday and up 4.6% Thursday—a record succession of daily moves exceeding 4%, each one in the opposite direction. That schizophrenic streak finally subsided—for now, at least—when stocks gained 0.5% Friday.
At one point, equities had skidded 17% in just 11 days, a sign that investors were quickly pricing in the increasing odds of a recession exacerbated by government belt-tightening in developed countries and credit-tightening in emerging economies. At their lows last week, big-cap stocks were 18% below their late-April highs, while small stocks had skidded 25% to fall below the 20% mark into conventional bear-market territory.
How much bad news are traders anticipating? The S&P 500 fell 26%, on average, from peak to trough over the past 11 recessions, notes one Wall Street, so stocks are already pricing in a roughly 60% chance of a typical U.S. recession. A very mild earnings recession, during which corporate profits fall just 8% or so, “appears to be fully priced in.”
There were other signs that the market has taken stock of much of the looming gloom, short of a pernicious recession. Money managers buying options to hedge their portfolios drove the VIX volatility index to its highest level since the financial crisis. Gold soared above $1,800 a troy ounce midweek, a record. The crop of stocks still holding above their 50-day averages shriveled to just 4% amidst broad heavy selling. At one point, frenetic bond buyers drove the yield on 10-year U.S. Treasuries below even the payout of the S&P 500, at about 2.18%. You don’t see this every day: Stocks offering a richer dividend than recently downgraded U.S. government bonds, in addition to potential capital appreciation, and still begging to find takers.
Further damage to shares probably is limited after this correction, but the longevity of any rebound still depends on how quickly the economy recovers. It helps that expectations are plummeting, and stocks had some help last week when companies including Cisco Systems (ticker: CSCO), Macy’s (M) and News Corp. (NWS) (which owns Barron’s) reported better-than-expected profits. The Fed also overcame some internal dissent and vowed to hold down borrowing costs well into 2013. Weekly mortgage applications jumped 22%, and the number of Americans filing jobless claims fell below 400,000 for the first time in four months.
But this good economic data could well prove fleeting, with financial conditions tightening in recent weeks, and with corporations and consumers alike shaken by Washington’s fiscal fight and the stock-market correction. A measure of consumer sentiment plunged to depths not seen since before Ronald Reagan was president, and Europe is still struggling to keep its debt crisis from exploding. Last week, the Old World sought to prevent panicked selling of French bank stocks by banning short-selling—never mind that a similar move here merely halted, momentarily, financial stocks’ 70% slide during the credit crisis. Banning short-selling, says Paul Hickey of Bespoke Investment Group, “will only prolong the ultimate adjustment to equilibrium.”
The Yo-Yo Market
The Standard & Poor’s 500 had a record run of four straight days of daily moves surpassing 4%, up or down, as the stock market struggled to find a bottom. Friday’s action was relatively mild—a mere 0.5% change.
Bulls, of course, have clung to the fact that corporations are still raking in record profits, even as the economy struggles. But it remains to be seen how long this happy “decoupling” between profits and economy can last. Michael Darda, MKM Partners’ chief economist and market strategist, notes how high-yield spreads have recently widened to 4.38 percentage points from 1.51 percentage points in February, and these precede earnings estimates for the S&P 500 by three to six months. If the high-yield market proves correct, there could be “more than 30% downside to analysts’ earnings expectations for the next year,” he says.
The Dow Jones Industrial Average ended last week down 176 points, or 1.5%, to 11269. The S&P 500 is down 12.4% over the past three weeks and 13.6% off its 2011 high. The Nasdaq Composite Index gave up 24, or 1%, to 2508, while the Russell 2000 lost 17, or 2.4%, to 698. Crude fell for a third straight week, while gold’s winning streak stretched to six (Source: Barrons Online).
The Numbers
Last week, US Stocks and Foreign Stocks decreased. Bonds increased. During the last 12 months, BONDS outperformed STOCKS. Returns through 8-12-2011 1-week Y-T-D 1-Year 3-Years 5-Years 10-Years Bonds- BarCap Aggregate Index .9 6.0 5.7 7.6 6.9 5.8 US Stocks-Standard & Poor’s 500 -1.6 -9.7 3.3 -6.3 -4.7 -.3 Foreign Stocks- MS EAFE Developed Countries -1.0 -9.6 3.2 – 6.9 -3.9 2.1 Source: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized excluding dividends.