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.

The following two tabs change content below.
Craig Birk, CFP®

Craig Birk, CFP®

Craig Birk leads the Personal Capital Advisors Investment Committee and serves as the 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.

Leave a Reply

Your email address will not be published.

Disclaimer. This Website may contain links to third-party websites. These links are provided solely as a convenience to you and does not imply an affiliation, sponsorship, endorsement, approval, investigation, verification, or monitoring by PCAC of the contents on such third-party websites. Please be advised that PCAC is not responsible for the content of any website owned by a third party.