A trio of weak data showing a pullback in consumer spending, softer manufacturing and falling inflation, fueled selling in an already nervous stock market on fears that the U.S. economy cannot hold the line against a global slowdown. Economists immediately slashed their U.S. GDP growth forecast for the third quarter. Last Wednesday, the Dow Jones Industrial Average plunged 350 points minutes after the opening, then recovered more than half its losses. The September Retail Sales report showed the first decline in eight months. Sales were down 0.3 percent, in large part due to fewer vehicle purchases and a decline in gasoline demand. Inflation data also disappointed with the Producer Price Index for final demand decreasing 0.1 percent, versus expectations for a 0.1 percent increase. For the week, the Dow and S&P finished down approximately 1 percent ending at 16,380 and 1,886 respectively. The four consecutive weeks of losses on the S&P 500 marked the longest such streak since August 2011.
What is capitulation when it’s used on Wall Street? In simple terms, capitulation is when investors try to get out of the stock market as quickly as possible and look for less risky investments. It’s also described as panic selling. It’s usually based on investor fears that stock prices will fall further than they have. In getting out of the market, investors give up previous gains in stock price. That means they incur a financial penalty, just to get out of stocks. Apparently all Wall Street needed to end its panic attack was a little money printing talk.
Fed officials are clearly taking notice of the extreme turbulence that has hit the markets in recent days due to fears about Europe’s economy, the Ebola outbreak and plunging oil prices. The big comeback was triggered by a Federal Reserve official who suggested the central bank could abandon its plan to pull away the easy money punch bowl that’s been juicing stock prices for years. A decision by the Fed to keep the program going would represent a big turnaround and a positive for stocks and other risky assets that have benefited from the stimulus.
It’s not all gloom and doom. Besides more magic from the Fed, stocks received support from a number of positive U.S. data points. The number of Americans filing new claims for jobless benefits fell to a 14 year low, a positive signal for the labor market that could counter doubts over whether the economy is shifting into a higher gear. That suggests the labor market is gaining steam and could bolster the view that the Federal Reserve will hike interest rates next year when the jobless rate is expected to continue to fall. While the appearance of the deadly Ebola virus in Texas is worrying the nation, it has yet to lead Americans to take a more cautious view over how to spend their money, data suggested last Friday. The Thomson Reuters/University of Michigan Index of Consumer Sentiment unexpectedly rose in early October to its highest level since July 2007.
U.S. Housing starts and permits rose in September, a signal the market’s modest recovery is supporting what appears to be growing strength in the broader economy. Housing is clawing back after it imploded during the 2007-2009 financial crisis and recession. It suffered a setback last year when interest rates spiked, but rates have been falling lately. New housing starts for single-family homes, the largest part of the market, rose 1.1 percent in September. Mortgage rates are following the slide in 10-year Treasury yields. The average rate for a 30-year fixed mortgage dropped to 3.97 percent, giving owners a new opportunity to refinance. The share of applicants seeking to refinance climbed to 58.9 percent, the highest since mid-February. The housing market could also be receiving a boost from Fannie and Freddie.
Fannie Mae, Freddie Mac, and mortgage lenders are nearing an agreement that could lower barriers and restrictions on borrowers with weak credit, a move that would expand access to home loans. The move comes in response to criticism that banks have clamped down too much on loan criteria to avoid legal liability for any mortgages they sell to Fannie or Freddie that may go bad in the future. Lenders have drawn their purse strings tighter than what Fannie and Freddie requires when evaluating loan applications, saying the threat of repurchase demands makes the risks worth taking only for borrowers with excellent credit profiles. Under the new rules, the financing firms would delineate what constitutes cause for requiring banks to repurchase loans.
Are you ready for another week of mayhem? Following the most turbulent market week in years, some strategists are ready to call the all clear. But others say stocks could test the lows of the past week—especially if there are more signs of a weakening global economy, Ebola headlines get worse, or U.S. corporate earnings fail to deliver. Earnings are expected from about 20 percent of the S&P 500, including tech companies, like Apple and Microsoft. Big Dow stocks including Boeing, McDonald’s, Coca-Cola and Caterpillar join a parade of consumer companies, automakers and industrials. However, there is little fresh U.S. economic data with the exception of Existing Home Sales Tuesday and CPI Inflation data Wednesday.