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Currencies Fluctuate; Unemployment Falls

 Market Digest – Week Ending 10/3

An end of week rally pared the decline in the S&P 500 to 0.75% for the week. But once again, with the backdrop of a stronger dollar, other asset classes did not fare so well. International stocks dropped 3.1%, small caps 1.3%, and oil 3.9%. The Euro ended the week at $1.251, down 1.4%. US Jobs came in stronger than expected and unemployment dropped to 5.9%. This will make it hard for the Fed not to raise rates early in 2015. Treasury yields dropped anyway as foreign investors chased returns in dollar-based assets and US investors sought safety.


Weekly Returns:

S&P 500: 1,968 (-0.8%)
FTSE All-World ex-US: (-3.1%)
US 10 Year Treasury Yield: 2.44% (-0.09%)
Gold: $1,193 (-2.1%)
USD/EUR: $1.251 (-1.4%)


Major Events:    

  • Monday – Growing pro-democracy protests in Hong Kong led to concerns about increased tension between China and the West, contributing to stock declines.
  • Tuesday – EBay announced it would spin off PayPal to shareholders by the end of 2015, amid new competition in electronic payments including Apple Pay.
  • Wednesday – The Eurozone announced a decline in manufacturing in Germany.
  • Wednesday – Small cap stocks fell more than 10% below their July high.
  • Wednesday – The first Ebola case was reported in the US.
  • Wednesday – Julia Pierson resigned as head of the Secret Service after a series of embarrassing incidents including an armed intruder scaling the White House fence and entering the building.
  • Thursday – The ECB announced it will buy asset backed securities, but did not mention government debt. Interest rates were held at record lows as expected. European stocks fell.
  • Thursday – JP Morgan announced a data breach that could impact 76 million households.
  • Friday – The US economy added 248,000 jobs in September, ahead of expectations. Unemployment dropped to 5.9%.

Our take:

The third quarter was frustrating for diversified investors. Large cap US stocks generated a positive return but almost all other asset classes fell. Small caps and International stocks were hit particularly hard. The first three days of the fourth quarter was no different. Since a high in May, the Euro has now dropped over 10% to the dollar. The Yen is off 8.4%. This drives international investors into dollar based assets. The easiest ones for them to buy are large cap stocks (often in the form of S&P 500 index funds) and Treasuries. It also leads to a decline in commodity prices based in dollars. Europe and Japan have their problems. Currency swings can last a long time, but they have their limits. The S&P 500 has been leading most other asset classes for most of the last five years. But eventually that will revert and other asset classes will lead. Markets are always and ever cyclical. The best chance for success is keeping a diversified approach and resisting the temptation to bet big trying to time any specific asset class.

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