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Market Commentary
Economic Updates
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Weekly Commentary
October 4, 2010
The
Markets
Third
Quarter Review
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Data
as of 9/30/10
|
3rd
Quarter
|
YTD
|
1-Year
|
3-Year
|
5-Year
|
10-Year
| |
Standard
& Poor's 500 (Domestic Stocks)
|
10.7%
|
2.3%
|
8.0%
|
-9.3%
|
-1.5%
|
-2.3%
| |
DJ
Global ex US (Foreign Stocks)
|
16.1
|
3.1
|
6.4
|
-9.3
|
2.2
|
2.3
| |
10-year
Treasury Note (Yield Only)
|
2.5
|
N/A
|
3.3
|
4.6
|
4.3
|
5.8
| |
Gold
(per ounce)
|
5.1
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18.4
|
31.3
|
20.7
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22.5
|
16.9
| |
DJ-UBS
Commodity Index
|
11.6
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0.8
|
9.9
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-7.7
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-4.7
|
2.8
| |
DJ
Equity All REIT TR Index
|
12.8
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18.9
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30.0
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-5.9
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2.1
|
10.6
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Notes: S&P 500, DJ Global ex
US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold
does not pay a dividend) and the three-, five-, and 10-year returns are
annualized; the DJ Equity All REIT TR Index does include reinvested dividends
and the three-, five-, and 10-year returns are annualized; and the 10-year
Treasury Note is simply the yield at the close of the day on each of the
historical time periods.
Sources: Yahoo! Finance, Barron's,
djindexes.com, London Bullion Market Association.
Past performance is no guarantee
of future results. Indices are unmanaged
and cannot be invested into directly. N/A means not applicable.
STOCK MARKET RISES SHARPLY
Thanks
to a super strong September (the best in 71 years, according to CNBC), stocks
rallied sharply for the quarter. It didn't start off that well as Fed Chairman
Ben Bernanke described the economic outlook as "unusually uncertain" in July.
The stock market basically treaded water in July and August as it digested the
second quarter's big drop and the uncertain economic environment. By the time
September rolled around, investors decided that the weak economy might actually
be good news for the stock market. How? In the (il)logical way that the market
sometimes works, investors began to believe that the economy was weak enough
that the Fed would step in at some point with another round of quantitative
easing. If that happened, interest rates might drop, the economy might get a
lift, and stock prices might follow. That's the theory, anyway, and investors
followed it by bidding up stock prices.
Third
Quarter Country Returns Based on the Dow Jones Global Indexes
Ranked
by U.S. Dollar Performance
Winners
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Sri
Lanka
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62.8%
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Latvia
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35.4
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Chile
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34.1
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Slovakia
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33.6
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Poland
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33.4
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Other Notables
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Brazil
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22.1
| |
U.K.
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18.9
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India
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16.1
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U.S.
|
11.0
| |
Japan
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4.4
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Source: Dow Jones Indexes
ECONOMY STILL STUCK IN LOW
GEAR
Normally,
deep recessions are followed by strong growth. But, not this time. More than a
year after the recession officially ended, we're still stuck with a 9.6% unemployment
rate and an economy that grew at a 1.7% annualized rate in the second quarter,
down from 3.7% in the first quarter, according to The Wall Street Journal and Bloomberg.
On
September 24, a concerned Ben Bernanke said, "A concerted policy effort has so
far not produced an economic recovery of sufficient vigor to significantly
reduce the high level of unemployment." That was followed on September 30 by
comments from New York Fed president William Dudley who said, "Further action
is likely to be warranted unless the economic outlook evolves in a way that
makes me more confident that we will see better outcomes for both employment
and inflation before too long." Together, these comments suggest to some market
participants that the Fed is gearing up to dole out more goodies to reignite
growth.
INTEREST RATES KEEP
DROPPING
Investors
still have a large appetite for bonds and the government and corporations
stepped in to supply it "as new-debt issuance broke records and interest rates
fell toward generational lows" in the third quarter, according to The Wall Street Journal. Like a coin,
there are two sides to low interest rates.
On
the plus side, low rates are a boon to corporations and banks as it lowers
their borrowing costs and encourages them to reinvest in their businesses. It
also helps the government because it lowers their borrowing costs.
On
the negative side, savers get pinched. According to Dan Dekta, chief investment
officer at Smith Breeden Associates, "The Fed has effectively been taxing money-market
funds [by cutting short-term interest rates] to recapitalize the financial
system and to make things easier on borrowers." So, if you're a saver, you get
near zip on your savings while borrowers reap the savings.
THE DOLLAR DILEMMA
"The
dollar seems to be the ugliest girl at the dance," according to Lane Newman,
director of foreign exchange at ING Groep NV in New York as quoted in Bloomberg.
With the U.S. economy still relatively weak, investors are losing enthusiasm
for the dollar because they fear the Fed will drive down interest rates even
further. Low interest rates make the dollar less attractive relative to other
countries that may offer higher rates. This concern helped drive the dollar to
a third quarter loss that was its worst quarterly loss in eight years,
according to MarketWatch.
A
weak dollar does benefit U.S. exporters because it makes our products less
expensive to foreign consumers. A strong export economy could help lower our
unemployment rate and that's one reason why our government is not too concerned
about a weak dollar. Here's the catch, though. Other countries may want a cheap
currency, too, so they can revive their own exports. Since the value of a
currency is only measured in relation to another currency (or a precious metal
like gold), if too many countries try to devalue their currency, then it
becomes a "race to the bottom." In that scenario, it's likely nobody will win.
And,
speaking of gold, it hit record highs in the third quarter. John Roque of WJB
Capital was quoted in Barron's as saying, "all the price of gold tells you is
what paper money isn't worth." And, as gold keeps going higher, that suggests
people are getting less and less comfortable with the value of paper money.
SUMMARY
The
big rally in the third quarter was preceded by a big drop in the second
quarter. Net, net, after nine months, the S&P 500 index is up 2.3% for the
year. Despite a lot of huffing and puffing, we're still just about where we
started the year. So, yes, the trading range is still alive and well.
Weekly
Focus - Think About It
"Live
as if you were to die tomorrow. Learn as if you were to live forever." --Mahatma
Gandhi
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