AMERIPRISE FINANCIAL, INC.
A Wild Week on Wall Street - Assessing the Fallout
10/20/2014 | David Joy
U.S. stocks fell for the fourth straight week, losing 1.0 percent, as the S&P 500 fell through its 200 day moving average for the first time in two years on Monday.
But a strong rally that began halfway through the trading session on Wednesday minimized the damage and allowed investors to breathe a little easier. When the rally began, stocks were already down 4.5 percent on the week. So far in this selloff, the S&P 500 is down 6.2 percent, on a closing price basis. From its high on September 18 to its low on October 15, the index had lost 7.4 percent. On an intraday basis, the index had fallen as much as 9.7 percent.
But, the Russell 2000 index of small stocks, which had fallen 13 percent since the start of the second quarter, began to rise on Tuesday, ahead of the large caps, and actually rose 2.8 percent for the week.
European stocks waited until Friday to rise, but not even a 3.0 rally on the day could prevent the Euro Stoxx 50 index from falling 1.0 percent for the week. It, too, had fallen 13 percent from its peak.
Bonds have gone on a similarly wild ride of their own. As stocks in the U.S. began to fall in mid-September, so too did bond yields. The ten-year U.S. Treasury note yield was 2.62 percent on September 17. By last Wednesday it had fallen to 2.14 percent, and at midday, when stocks were bottoming, it had fallen as low as 1.90 percent. On September 24, the yield on the two-year note was 0.59 percent. Last Wednesday it closed at 0.30 percent, and fell as low as 0.26 percent on Thursday, before ending the week at 0.37 percent.
Economic Weakness Overseas
These declines have come amid evidence of slower global growth and intensifying disinflationary pressures, especially in Europe. And while at the start of this bout of weakness equity valuations were arguably not excessive, they were certainly high enough to leave little room for disappointment.
But disappointment did come, in the form of an emerging concern that central banks could no longer be relied upon to come to the rescue. In the case of the Federal Reserve, QE3 was coming to an end and interest rates were likely to begin rising next summer.
In the case of the European Central Bank (ECB), investors were growing increasingly impatient with the deliberate pace of policy accommodation, amid worries that what they really hoped for, quantitative easing, was politically impossible.
Not surprisingly then, what apparently triggered the turnaround last week were some soothing comments from officials at both the Fed and ECB. St. Louis Fed President Bullard suggested that quantitative easing could be extended in light of the decline in inflation expectations. And ECB Executive Board member Benoit Coeure said the bank will soon begin to implement its plan to purchase asset-backed securities.
Whether these comments constitute anything more than a short-term palliative for markets remains to be seen. That depends on what these central banks do, and to what effect. The Fed meets on October 28 and 29, and will have to address the pending end of QE3. It is widely expected that the program will be allowed to expire. But how that is communicated will be important. The job of the ECB is more difficult. The sovereign members of the Eurozone are not on the same page when it comes to either monetary or fiscal policy, limiting the bank's effectiveness. And sanctions against Russia and weakness in China are having a meaningful impact on growth.
U.S. Growth Remains Steady
Overall, conditions in the U.S. remain sound. Growth in the third and fourth quarters will likely average around 3.0 percent. And the recent downturn has pushed mortgage rates lower, along with gasoline and heating fuel prices. And although it is early in the third quarter earnings season, with about 15 percent of the S&P 500 having reported, the results have been decent.
On the other hand, the dollar's recent strength inhibits export growth, beyond the general global weakness. Wildcard issues like the Ebola outbreak and fighting in the Middle East are likely to have a greater impact on sentiment than on economic activity in the near-term. So far, the extent of this downturn is consistent with other historical experiences associated with the approaching start of a Fed tightening cycle. But those experiences were mostly associated with accelerating economic activity and rising inflationary pressures. The concern this time, however, has shifted rather quickly from rising rates to falling demand and falling price expectations.
Because of these near-term issues, a moderately more defensive portfolio posture may be appropriate for now. In the longer term, we continue to find equities attractive on a relative basis.
Lastly, this episode has been accompanied by a spike in market volatility. The VIX index has doubled since the start of the third quarter, and it may stay elevated for a while. The last time it was this high was in the summer of 2012, just before ECB President Draghi pledged to do whatever it takes to preserve the euro. That statement helped trigger an uninterrupted two-year rally in stocks. He may soon be called upon to fulfill that promise in order to keep the rally going.
Important Disclosures:
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.
The Standard & Poor's (S&P) 500 Index tracks the performance of 500 widely held, large-capitalization U.S. stocks.
The Russell 2000® Index is a market-capitalization-weighted index made up of the 2,000 smallest US companies in the Russell 3000.
The EURO STOXX 50 is a market capitalization-weighted stock index of 50 large, blue-chip European companies operating within eurozone nations. The universe for selection is found within the 18 Dow Jones EURO STOXX Supersector indexes, from which members are ranked by size and placed on a selection list.
The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) is a widely used measure of market risk. It shows the market's expectation of 30-day volatility. The VIX is constructed using the implied volatilities of a wide range of S&P 500 index options.
Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution and involve investment risks including possible loss of principal and fluctuation in value.
Brokerage, investment and financial advisory services are made available through Ameriprise Financial Services, Inc. Member FINRA and SIPC.
© 2014 Ameriprise Financial, Inc. All rights reserved.
10/20/2014 | David Joy
U.S. stocks fell for the fourth straight week, losing 1.0 percent, as the S&P 500 fell through its 200 day moving average for the first time in two years on Monday.
But a strong rally that began halfway through the trading session on Wednesday minimized the damage and allowed investors to breathe a little easier. When the rally began, stocks were already down 4.5 percent on the week. So far in this selloff, the S&P 500 is down 6.2 percent, on a closing price basis. From its high on September 18 to its low on October 15, the index had lost 7.4 percent. On an intraday basis, the index had fallen as much as 9.7 percent.
But, the Russell 2000 index of small stocks, which had fallen 13 percent since the start of the second quarter, began to rise on Tuesday, ahead of the large caps, and actually rose 2.8 percent for the week.
European stocks waited until Friday to rise, but not even a 3.0 rally on the day could prevent the Euro Stoxx 50 index from falling 1.0 percent for the week. It, too, had fallen 13 percent from its peak.
Bonds have gone on a similarly wild ride of their own. As stocks in the U.S. began to fall in mid-September, so too did bond yields. The ten-year U.S. Treasury note yield was 2.62 percent on September 17. By last Wednesday it had fallen to 2.14 percent, and at midday, when stocks were bottoming, it had fallen as low as 1.90 percent. On September 24, the yield on the two-year note was 0.59 percent. Last Wednesday it closed at 0.30 percent, and fell as low as 0.26 percent on Thursday, before ending the week at 0.37 percent.
Economic Weakness Overseas
These declines have come amid evidence of slower global growth and intensifying disinflationary pressures, especially in Europe. And while at the start of this bout of weakness equity valuations were arguably not excessive, they were certainly high enough to leave little room for disappointment.
But disappointment did come, in the form of an emerging concern that central banks could no longer be relied upon to come to the rescue. In the case of the Federal Reserve, QE3 was coming to an end and interest rates were likely to begin rising next summer.
In the case of the European Central Bank (ECB), investors were growing increasingly impatient with the deliberate pace of policy accommodation, amid worries that what they really hoped for, quantitative easing, was politically impossible.
Not surprisingly then, what apparently triggered the turnaround last week were some soothing comments from officials at both the Fed and ECB. St. Louis Fed President Bullard suggested that quantitative easing could be extended in light of the decline in inflation expectations. And ECB Executive Board member Benoit Coeure said the bank will soon begin to implement its plan to purchase asset-backed securities.
Whether these comments constitute anything more than a short-term palliative for markets remains to be seen. That depends on what these central banks do, and to what effect. The Fed meets on October 28 and 29, and will have to address the pending end of QE3. It is widely expected that the program will be allowed to expire. But how that is communicated will be important. The job of the ECB is more difficult. The sovereign members of the Eurozone are not on the same page when it comes to either monetary or fiscal policy, limiting the bank's effectiveness. And sanctions against Russia and weakness in China are having a meaningful impact on growth.
U.S. Growth Remains Steady
Overall, conditions in the U.S. remain sound. Growth in the third and fourth quarters will likely average around 3.0 percent. And the recent downturn has pushed mortgage rates lower, along with gasoline and heating fuel prices. And although it is early in the third quarter earnings season, with about 15 percent of the S&P 500 having reported, the results have been decent.
On the other hand, the dollar's recent strength inhibits export growth, beyond the general global weakness. Wildcard issues like the Ebola outbreak and fighting in the Middle East are likely to have a greater impact on sentiment than on economic activity in the near-term. So far, the extent of this downturn is consistent with other historical experiences associated with the approaching start of a Fed tightening cycle. But those experiences were mostly associated with accelerating economic activity and rising inflationary pressures. The concern this time, however, has shifted rather quickly from rising rates to falling demand and falling price expectations.
Because of these near-term issues, a moderately more defensive portfolio posture may be appropriate for now. In the longer term, we continue to find equities attractive on a relative basis.
Lastly, this episode has been accompanied by a spike in market volatility. The VIX index has doubled since the start of the third quarter, and it may stay elevated for a while. The last time it was this high was in the summer of 2012, just before ECB President Draghi pledged to do whatever it takes to preserve the euro. That statement helped trigger an uninterrupted two-year rally in stocks. He may soon be called upon to fulfill that promise in order to keep the rally going.
Important Disclosures:
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.
The Standard & Poor's (S&P) 500 Index tracks the performance of 500 widely held, large-capitalization U.S. stocks.
The Russell 2000® Index is a market-capitalization-weighted index made up of the 2,000 smallest US companies in the Russell 3000.
The EURO STOXX 50 is a market capitalization-weighted stock index of 50 large, blue-chip European companies operating within eurozone nations. The universe for selection is found within the 18 Dow Jones EURO STOXX Supersector indexes, from which members are ranked by size and placed on a selection list.
The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) is a widely used measure of market risk. It shows the market's expectation of 30-day volatility. The VIX is constructed using the implied volatilities of a wide range of S&P 500 index options.
Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution and involve investment risks including possible loss of principal and fluctuation in value.
Brokerage, investment and financial advisory services are made available through Ameriprise Financial Services, Inc. Member FINRA and SIPC.
© 2014 Ameriprise Financial, Inc. All rights reserved.
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