Fears of Global Slowdown Sends Stocks Lower

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Just when you thought it was safe to tip your toe back into the equity markets, stock market investors were greeted with another ugly week of losses as worries about a global economic slowdown resurfaced. We started the week having largely recovered from the huge sell-off of the previous week, thanks to the downgrade of United States long-term debt by the Standard & Poor’s on August 5. However, by midweek, stocks were all heading south again, as investors put their concerns on the growing European debt crisis, and the possibility of another recession here in the U.S. We closed out last week at the lows of the session and just barely above the key support level of 1,120 for the S&P 500. Unfortunately it was the fourth consecutive week of market declines as investors continue to be very shaky to say the least.

With continued volatility last week, all of the major domestic indexes ended the week sharply higher. The Dow’s 4.3% gain on the week came after a 15% decline over the previous four weeks. The Standard & Poor’s 500-stock index gained 53 points on the week or 4.7%, and now sits at a level of 1,177, led higher by technology and consumer discretionary stocks. Meanwhile the technology-heavy Nasdaq Composite surged by 138 points, or 5.9%, to a mark of 2,480. And thankfully the smaller-cap stocks, as represented by the Russell 2000, which have been the biggest laggards on the year, popped by 40 points, or 6.2%, and now sits at the 692 level. All in all, it was the stock market’s second-best week of 2011!

To show you the carnage of the past couple of weeks in the equity markets, consider that the Dow is now down some 11% for month of August and 6.56% for the year. It gets even worse for the Standard & Poor’s 500-stock index, which has tumbled 16% over its four-week losing skid and is now down 10.66 percent on the year. Meanwhile the tech-heavy Nasdaq Composite hit a fresh 2011 closing low, as it has fallen 18% over the past four weeks and for the year, it’s now off some 11.72%. The smaller-cap stocks as represented by the Russell 2000 has fared even worse as it is now down 16.84 percent for the year and from its peak, is officially in ‘bear’ market territory.

Gold continues to catapult to record high thanks largely to the worries over the U.S. economy and Europe’s banking system. Gold hit another record high this past week to $1,852.20 per troy ounce, which was the ninth record settlement during this month alone. Gold has stood out as the one asset class likely to withstand a deteriorating global economic environment with investors flocking to buy the yellow metal through futures, physical-gold exchange-trade funds and coins. As gold continues on its historic rally, some investors are buying in search of gains, rather than to protect against losses in other assets. That has led to some talk that gold’s scorching climb has now created a bubble.

Treasury securities continued to once again post strong gains last week, as investors were falling all over themselves as they leaped into U.S. Treasuries, largely on the flight to safety from equities. The downward drift was despite a rise in headline inflation numbers for both the producer price index and that of the consumer price index. Some of the upward pressure on inflation was seen as temporary – especially since prices for crude oil have come down significantly as of late. Downward pressure on Treasury yields also came from weak economic news – notably housing starts, existing home sales, and the Philly Fed report. Again, most Treasury yields across all the maturity spectrum are at record lows, with the 10-year Treasury yield touching 1.974% this past Thursday for the first time in half a century1.

Looking ahead to this week, the market’s attention will more than likely turn to the Federal Reserve’s annual symposium held in Jackson Hole, Wyoming, for signs of how confident the chairman of the Federal Reserve, Ben Bernanke, is about the strength of the American recovery. If you recall, at last year’s symposium, Mr. Bernanke paved the way for a second round of large-scale bond purchases, or quantitative easing. However, after the Fed this month already promised to keep short-term interest rates close to zero until mid-2013, few pundits are expecting a further stimulus to be widely declared from the Fed, at least at this moment.

Earnings season has mostly wound down as far as the big market movers but there are still several companies, which will be dribbling out earnings reports. This week we will have many companies that still matter which are due to release earnings and we would expect that some of these could be the big movers on the week. The top reports for the coming week include the following: H.J. Heinz, Corinthian Colleges, Trina Solar, Williams Sonoma, American Eagle Outfitters, Applied materials, Guess, Inc., Toll Brothers, Krispy Kreme Doughnuts, and Pandora Media.

As we finish off the last week of August, don’t be surprised if this wild volatility continues, at least for the short-term, given that many of the stock market ‘players’ are currently on vacation. Presently, if the stock market were a mental health patient, it would have definitely been committed by now. Major trend changes are occurring at points of wild volatility and extreme fear. Thus it probably would be smart to keep those seat belts fastened tightly. The good news is that we’re almost through the month of August, which historically has always been weak. Again, should you have any questions or concerns, be sure and give us a call. Until next week, take care!

Sources:Barron’s, Wall Street Journal, Associated Press, Econoday, Gorilla Trading, Dow Jones & Company, Briefing.com

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