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Market Digest – Week Ending 10/19

Friday marked the 25th anniversary of Black Monday. Stocks fell, but at 1/15th the magnitude. For the week, the picture was brighter. Global equities held on to gains. Economic news was mixed while corporate earnings, particularly in the tech sector, disappointed. Treasuries, which are less sensitive to earnings than the general economy, fell.

Weekly Returns

S&P 500: 1,433 (+0.3%)

MSCI EAFE: (+1.8%)

US 10 Year Treasury Yield: 1.76% (+0.10%)

Gold: $1,721 (-1.9%)

USD/EUR: $1.303 (+0.5%)

Major Events                                                                                                                                                         

  • Monday – Japanese Softbank announced it will buy a 70% stake in Sprint Nextel for approximately $20 billion.
  • Monday – September retail sales grew at 1.2%, ahead of expectations.
  • Monday – BlackRock, the largest provider of ETFs, responded to recent moves by Vanguard and Schwab by announcing it would drop fees on several ETFs.
  • Tuesday – Citigroup CEO Vikram Pandit stepped down after clashing with the board, leading many to speculate the massive company will sell assets or split up.
  • Wednesday – US September housing starts increased 15% from August and 34% from last year, exceeding expectations and indicating the housing market is gaining momentum.
  • Thursday – Intel and IBM each released disappointing earnings results.
  • Thursday – Google reported disappointing earnings results. Shares fell 9%.
  • Thursday – Chinese GDP growth for the third quarter was reported at 7.4%, continuing a deceleration trend.
  • Friday – The S&P 500 fell 1.7% as companies such as GE, McDonalds and Microsoft issued disappointing earnings results.

Our Take

Corporate earnings have been the bright spot in a rather anemic economy over the last few years. So the rapid fire misses this week from some of the biggest names in the S&P 500 are a real concern. However, the fact that stocks still rose for the week is a good indication of how much negative sentiment is already factored into market prices. This is bullish.

Technology companies had a particularly disappointing week, reflected by a 1.5% drop in the tech-heavy NASDAQ 100. Tech has been a favorite sector for investors this year. It is currently the largest in the S&P 500, with a weight of roughly 20%, including about 4.5% from Apple. Unfortunately, Apple’s success does not occur in a vacuum and is negatively impacting lots of other companies. Those reliant on the PC market like Microsoft, Intel and Hewlett-Packard feel it most. It has only been 12 years since tech lost 80% in the dot-com crash, but memories are short. We’re not bearish on tech, but we urge investors to make sure they understand and are comfortable with their exposure, even if it comes only in the form of index funds.

25 years after Black Monday, the media is replete with doom scenarios about the impact of automated electronic trading. This is silly. Advances in technology have created the safest, most secure market in history. Panics are part of investing and will never go away. Those who can’t handle the possibility of a 10% or 20% one day drop shouldn’t own stocks. But those who can should be rewarded handsomely over time.

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