Ameriprise Financial : How Might Global Markets React to Last Week’s Events?

How Might Global Markets React to Last Week's Events?

The six-week long winning streak for stocks came to an abrupt end last week, as share prices succumbed to concerns over global growth and likelihood of a Fed rate hike in December. The S&P 500 shed 3.6 percent, with most of the damage coming on Thursday and Friday. The downdraft was enough to push the index back into negative territory for the year, down 1.7 percent. The steepest losses came in the energy sector, which plunged 5.5 percent.

The price of domestic crude oil fell 8 percent to $40.74 a barrel, not far above its low for this cycle of $38.24 reached back in August, as supplies reached an all-time high. Consumer discretionary stocks were also battered, losing 4.5 percent, with the worst of the decline coming on Friday after a weaker than expected retail sales total for October. Department stores were particularly hard hit. Macy's fell 20 percent on the week. Nordstrom lost 18 percent. Tech stocks were also among the week's biggest losers. Only the defensive utilities sector managed to squeeze out a modest gain of 0.7 percent.

Bond yields slipped on the week as well. The yield on the ten-year Treasury note fell to 2.7 percent from 2.33 the previous week. The yield on the two-year note fell to 0.84 from 0.89 percent.

Foreign stocks were a little better, with the MSCI EAFE index losing 1.8 percent in dollar terms, partly in response to weaker than expected third quarter growth in the Eurozone, and the MSCI Emerging Markets index dropping 3.8 percent. The dollar was fractionally weaker in choppy trading. The economic calendar for this week contains readings on consumer prices, industrial production and housing starts and permits.

Market Activity Pales in Comparison to the Horrific Events in Paris

Of course, the relative importance of last week's market activity is insignificant in light of the barbaric massacre in Paris on Friday evening, and our thoughts and prayers are with the victims and their families.

Markets in France opened on Monday as usual. If the pattern of trading immediately following previous terror attacks in Europe is any guide, there may be some immediate weakness in share prices as investors look to reduce risk, but the reaction is likely to be relatively transitory. There could some be increased trading activity in safe haven assets such as government bonds, gold and even some speculative buying in oil.

There may be more of a lingering impact on the French economy given the importance of tourism. Some of the reaction will depend on what might come out of the G-20 meeting in Turkey in terms of possibly intensified military response, and security concerns related to the wave of migration coming from the Middle East.

Has the Latest Rally Run its Course?

Last week's events leave investors wondering if the rally from late September has run its course, or whether an upturn in global economic activity will arrive in time to prevent the selloff from worsening. The empirical evidence of the past few months has made the case for an economic upturn a tough sell. The argument has relied on the firming of global Purchasing Manufacturing Indices (PMIs) and the stimulative efforts of central governments and central banks, and an expectation that the dollar rally will fade. The widespread adoption of such a view is increasingly likely to wait until there is hard evidence of improvement, rather than just the expectation of it.

As for the Fed, its case for raising rates was not helped by the weak retail sales number. The consumer has been a steady contributor to the recovery of late, helping to offset a slowdown in manufacturing emanating from weakness overseas. And with unemployment at 5.0 percent and gasoline prices back to where they were in the spring, that contribution was not expected to be in doubt. Consumer spending patterns may indeed be changing, and there is some question whether that is being accurately captured in the data. Let's hope that is the case.

Important Disclosures:
The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.

Morgan Stanley Capital International EAFE Index (MSCI EAFE), an unmanaged index, is compiled from a composite of securities markets of Europe, Australasia and the Far East.

Morgan Stanley Capital International (MSCI EMF) market capitalization weighted index is composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. The MSCI EMF Index excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners.

The Markit PMI (Purchasing Managers' Index) series are among the most closely watched economic indicators in the world, tracking business conditions in over 30 countries. They provide advance insight into the private sector economy by tracking variables such as output, new orders, employment and prices across key sectors.

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.

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.

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