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Stocks Take Roller Coaster Ride As Volatility Here To Stay

Market Digest – Week Ending 10/10

Volatility is back. Fear of recession in Germany and the greater Eurozone contributed to a 3.1% drop in the S&P 500. Once again, small caps suffered greater declines. Fed minutes released Wednesday indicated fear about overseas economic weakness and a strong dollar may delay interest rate hikes. Stocks bounced on the release, but returned these gains and more over the rest of the week. On Friday, the semi-conductor sector was hit especially hard, with the iShares Semiconductor ETF losing nearly 7%.

Weekly Returns:

S&P 500: 1,906 (-3.1%)
FTSE All-World ex-US: (-3.1%)
US 10 Year Treasury Yield: 2.28% (-0.20%)
Gold: $1,223 (+2.7%)
USD/EUR: $1.262 (+0.9%)

Major Events:    

  • Monday – Hewlett-Packard announced the 75 year old company will be split into two parts, PCs plus printers and Enterprise.
  • Monday – A Spanish medical worker tested positive for Ebola, marking the first transmission to occur outside of Africa.
  • Tuesday – Turkey said a major Syrian border city was at risk of falling to Islamic State and urged the US to increase help for Iraqi and Syrian ground troops.
  • Tuesday – The IMF cut its global growth outlook from 4% to 3.8%. German manufacturing for September declined 4.8%.
  • Wednesday – Federal Reserve minutes showed members are concerned with soft overseas growth and the rising dollar, which may delay interest rate increases.
  • Friday – A Kurdish diplomat warned civilians in the Syrian city of Kobani are in danger of being massacred by Islamic State. The US increased airstrikes to attempt to protect the city.
  • Friday – Stocks declined, let by the Tech sector, dragging the Dow Industrials index into negative territory for the year.

Our take:

The S&P and Nasdaq suffered their worst week in two years, and that was despite a big up day on Wednesday. Volatility, in hibernation for the past two years, appears to be back. Like 2011, which marked the last 10% correction we’ve seen in the S&P 500, the driver is weak growth in Europe.

If you think interest rates are low in the US, it is worth a look at Europe. The German 10 Year Bond yields 0.89%. Even “troubled” nations like Italy and Spain have very low rates. If another recession hits, the ECB will try to be accommodating and keep yields low. But Germany has so far resisted the purchase of sovereign debt, and there may not be much that can be done. Who will wants to lend money for almost no return to deeply indebted countries with negative economic growth?

In 2011, Europe and the US grew out of recession fears and the markets raced higher for the next three years. The same could happen again, or there could be bigger losses ahead. The calm was nice while it lasted. But with Small Cap stocks down over 12% from their high and International stocks down over 10%, it’s probably safe to say it’s over. If you’ve been ignoring your portfolio and are not sure what your asset allocation is, now is a good time to make sure you feel comfortable with it.

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