Economy Teeters as Global Stock Market Downturn

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Worries that the U.S. economy may be slipping back into another recession along with continued fears of a possible Greek default, saw the U.S. equity markets experience their worst weekly decline since the fall of 2008. (Although the S&P 500 market have been this low in August already two times) Global investors dumped everything from stocks to corporate bonds to foreign currencies and fled to the safety of U.S. Treasury’s. The Dow, which had plunged over 674 points on Wednesday and Thursday of last week, suffered the sixth largest weekly point drop in its 115-year history. That makes it seven out of the last nine weeks of being in the red. Overseas it was even bloodier, as the 7% global sell off last week has now cut major markets’ price/earnings ratios to near their 2009 lows. Right now, both French and German stocks are already in a bear market, as are the small-stock Russell 2000 index and the Dow Jones Transportation Average. Needless to say, this past week’s sell off dashed hopes that stocks were on the mend following their severe August declines.

Despite the fact that stocks managed to edge slightly higher last Friday, it was no doubt a horrendous week for equities to say the least. The Dow Jones Industrial Average was pummeled to the tune of 6.41%, or more than 700 points, and now rests at the precariously dangerous 10,771 level. The Standard & Poor’s 500 index gave up 6.54% on the week for its second largest weekly decline of the year. It currently sits at the range bound mark of 1,136, although on that bloody Thursday, it did dip through the 1,120 support level. The S&P has now fallen some 16.7% from its peak in April, and the Dow is off some 15.9% from its own April high. Meanwhile, the technology-oriented Nasdaq composite dropped 5.30% for the week, and is now off 13.6% from its spring peak. As we already mentioned above, the Russell 2000 index of smaller-cap stocks is already in a bear market, and finished out the week lower by 8.66%.

On a year-to-date basis, the major equity indexes now find themselves deeply in the red, and unfortunately trending southward on a technical basis. Thus far for 2011, the Dow Jones Industrial Average index is off 6.96 percent; the Standard & Poor’s 500 is off by 9.64 percent; the Nasdaq Composite index is down 6.39 percent; and the Russell 2000 is off a miserable 16.74 percent.Not surprising, Treasury yields dropped to nearly 40-year lows, after the Federal Open Market Committee announced it would purchase $400 billion of longer-term Treasury securities, to be offset by the sale of shorter-term paper in order to lower long-term interest rates. This program has become known as ‘Operation Twist.’ The result of such had the 30-year Treasury bond rally ferociously this past Thursday, sending its yield to 2.738%, the lowest since December 2008. Meanwhile the 10-year benchmark yield hit 1.672% that Thursday, within a basis point (1/100th of a percentage point) of the historic low reached back into the 1940s. The 10-year note did end the week at a mark of 1.84%, down 22 basis points on the week. The Fed’s anticipated sale of shorter maturities naturally lifted the two-year-note yield some five basis points on the week, to a still hard-to-believe level of 0.22%.This week should be very eventful, as both the European and US central banks have announced they will coordinate their efforts to reduce risk and prevent a crisis. We’ll also be greeted with a plethora of data. On Monday, new-home sales are to be reported, and it’s estimated that they will have fallen some 4% in the month of August. On Tuesday, we get the S&P Case-Shiller data on home prices, which again will more than likely show a decline. On Wednesday the durable-goods order figures will be released, and hopefully the consensus estimate will show such rising 0.5% in August from July. The final report on second-quarter real gross domestic product will also be released. The hopes here are predicated on an increase in growth to a paltry 1.4%. Friday bring us to the end of the third quarter, and most investors will more than likely say good riddance.Look for continued volatility this week as the ongoing debate over how to handle all the sovereign debt issues continues to surface around the globe. The one thing that markets hate more than anything else is that of uncertainty, so let’s hope Bernanke, the European Commission, the International Monetary Fund, and the Fed can get their acts together as we move forward. As we close out the quarter this week, there obviously will be a tug-of-war between the ‘bears’ and the ‘bulls,’ so ‘hang onto your hats!’ 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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