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Daily Capital

Market Digest – Week Ending 10/12

Global economic news was mostly negative, leading to a decline in stock prices and an increase in Treasuries. Spanish debt was downgraded by Standard & Poor’s, creating a temporary spike in the country’s bond yields, but rates finished lower for the week. Earnings season kicked off with mixed results. Alcoa made investors nervous by citing a slowdown in China. Wells Fargo posted a 22% earnings increase due to strong mortgage activity but had a disappointing net interest margin. JP Morgan also released earnings Friday, posting a 35% increase. Gold prices fell and oil increased.

Weekly Returns

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S&P 500: 1,429 (+2.2%)

MSCI EAFE: (-1.0%)

US 10 Year Treasury Yield: 1.66% (-0.07%)

Gold: $1,755 (-1.5%)

USD/EUR: $1.296 (-0.5%)

Major Events

  • Monday – A House intelligence committee report ruled that Chinese telecommunications companies Huawei and ZTE pose security risks to the US, heightening tensions between the US and China.
  • Monday – Finance ministers from the 17 euro countries declared the European Stability Mechanism operational and commented that Spain isn’t on the verge of tapping it.
  • Tuesday – Aluminum giant Alcoa cut its global growth forecast for the metal by 1%, to 6%, citing slowing demand in China.
  • Tuesday – IDC and Gartner said personal computer shipments dropped 8% in the third quarter, the largest drop since 2001.
  • Wednesday – Standard & Poor’s cut Spain’s debt rating two notches to BBB-, one level above junk.
  • Thursday – Unemployment in Greece rose to 25.1%.
  • Thursday – Japanese phone and internet company Softbank said it is in talks to purchase a major stake in Sprint Nextel.
  • Friday – Wells Fargo reported a 22% increase in net earnings, but net interest margin fell from 3.91% to 3.66%.

Our Take

Some of this week’s market declines can be attributed to a lack of progress toward a permanent solution to Spain’s debt problems. The media focused on S&P’s rating cut, but a rating cut is a symptom, not a disease. Spanish interest rates initially spiked, but quickly retreated.

It is another example of rating agencies being woefully behind and incapable of adjusting to the rapidly changing environment. The recent ECB program put in place to be able to buy Spanish debt means the likelihood of a default is lower, not higher, than it was a few weeks ago.

There is significant speculation that Spain will request a bailout this weekend. While possible, we think Spain will wait longer. Either way, it will be dictated by the markets, not the rating agencies.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Craig Birk leads the Personal Capital Advisors Investment Committee and serves as Chief Investment Officer. His focus is translating improvements in technology into better financial lives. Craig has been widely quoted in the Wall Street Journal, Bloomberg, CNN Money, the Washington Post and elsewhere. Prior to Personal Capital Advisors, he was a leader within the portfolio management team at Fisher Investments, helping assets under management grow from $1.5 billion to over $40 billion. Craig graduated from the University of California at San Diego and has earned the Certified Financial Planner® designation.
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