Market Digest – Week Ending 9/25
Stocks continued to fall in the wake of last week’s Fed announcement to leave rates unchanged. A general feeling of uncertainty around interest rates and the magnitude of the economic slowdown in China drove many to reduce risk levels. Caterpillar’s reduction in revenue forecast also stoked pessimism. Small caps, Biotech and International saw bigger declines.
S&P 500: 1,931 (-1.4%)
FTSE All-World ex-US: (-3.2%)
US 10 Year Treasury Yield: 2.17% (+0.04%)
Gold: $1,146 (+0.6%)
USD/EUR: $1.120 (-0.8%)
Monday – Biotech stocks fell after Hillary Clinton tweeted that she would announce a plan to counteract “price gouging” by drug manufacturers.
Tuesday – Volkswagen admitted it’s emissions problem was much bigger than previously believed. Shares dropped 17%.
Tuesday – Commodity prices dropped on fears of slowing growth in China. Copper fell 3.8%.
Wednesday – Brazil’s central bank announced it was taking actions to support the real.
Thursday – Caterpillar cut revenue forecasts for this year and next. Shares fell.
Thursday – Pope Francis became the first pope to address a joint meeting of the US Congress.
Thursday – Fed Chairwoman Yellen laid out a case for raising rates sometime in 2015.
Friday – House Speaker John Boehner announced he will resign on October 30, citing a desire to avoid leadership turmoil and protect the institution.
It is easy to get caught up in fear about a global economic slowdown because the situation in China is so hard to predict. We notice an interesting sentiment environment where confidence in US equities remains fairly high despite recent declines, but almost everyone is extremely negative on emerging markets and commodities. These fears may now be exaggerated in markets. It takes about 65% more Brazilian reals to buy a dollar now than a year ago, and oil is around half of what it was a year ago. Emerging markets stocks are down around 25% from a 2015 high in April. All of this could be viewed as an indication that the global economic growth has already significantly slowed.
But eventually, emerging markets and commodities will rebound. There may be more pain first, but for those with diversified portfolios, now is not the time to abandon them. Much or most of the damage has been done. And if you are sitting in an all dollar based portfolio, it has been a good ride, but there may farther to fall if a nasty bear market emerges.