Market Digest – Week Ending 10/12

in Market Commentary by

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

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.

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Craig Birk, CFP®

Craig Birk, CFP®

Craig Birk is a member of the Personal Capital Advisors Investment Committee. He also serves as Vice President of Portfolio Management. Prior to Personal Capital Advisors, he was an integral leader within the portfolio management team at Fisher Investments. During Craig’s time there, the company increased assets under management from $1.5 billion under management to over $40 billion. His responsibilities included risk management, portfolio implementation oversight, and management of all securities and capital markets research analysts. Mr. Birk graduated from the University of California at San Diego and has earned the Certified Financial Planner® designation.

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