A Labor Day Bounce Back

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What a difference a month makes! Stocks snapped back from a dismal August, and over the course of the first three days of September all the major equity indexes picked up solid ground just when the markets were looking at a ‘fourth and long’ situation. (This in honor of the beginning of the collegiate football season.) First, consider the damage done in August, which registered the worst monthly performance in nearly ten years. Investors experienced a 4.7% loss for the Standard & Poor’s 500, while the Dow gave up 4.3%. It was even worse for the Nasdaq and the Russell 2000, as they lost 6.2% and 7.5% respectively for the last month of summer. The three-day Labor Day weekend obviously could not come quick enough…

However, starting this past Wednesday, investors began to wade back into the ‘equity pool’ with the vengeance of the allegiance of an Alabama or Auburn football fan. On the week, the Dow Jones Industrial Average stopped a three-week slide and added 297 points, or 2.9%, to 10,448. However, this blue-chip index is still up an anemic 0.19% thus far for the year. The S&P 500 ended the week higher by 40 points, or 3.8%, and now rests at a level of 1,105. Meanwhile the Nasdaq Composite Index headed north to the tune of 3.7% while the Russell 2000 index of smaller-cap stocks jumped 4.3%. It certainly was a nice way for the bulls to close out what has been a rough-and-tumble summer. What caused the bounce was a mixture of better-than-expected news in both the manufacturing sector and an improved reading in consumer confidence. Last Friday’s employment report was not as bad as a lot of the bulls had expected. Now granted, unemployment ticked up from 9.5% to an expected 9.6%, and yes, the 54,000 lost jobs were distressing if not depressing. However, it could have been worse as most economists had predicted that we would lose approximately 105,000 jobs. None of the aforementioned stats are causes for celebration, but they nonetheless suggest our faltering economy may not be faltering as much as we had previously feared. Right now the trick will be to somehow encourage job creation in this slowing economy, but again, considering all the uncertainty over the forthcoming political races, most businesses are more apt to sit on their hands and not do anything until a clearer picture comes into focus. So the $64,000 question now becomes, what does the rest of the year bode for investors? Currently the majority of investors are content to be ‘fence sitters, as the clouds of economic uncertainty continue to hang over us. Although the Federal Reserve has made it clear that it stands ready to increase our money supply, this stimulus package still can’t create new jobs or persuade our local banks to begin lending again. Currently the White House is preparing a fiscal-policy package that should included tax cuts and some targeted spending, but public skeptcism remains high. Given all the imbalances and the mysterious things that are at play right now, caution still remains the key. There is so much bearishness out there that you could possibly make a bullish case (contrarian thinking,) but then again, the economy and so many things like the employment picture and housing market make most investors wanting to crawl into a hole. With respect to the bond market, after it became apparent that the world wasn’t coming to an end, investors started jettisoning their bond positions, one of the biggest beneficiaries of the summer malaise. The yield on the benchmark 10-year note ended the week at 2.715%, which was a big jump from the low of 2.478% this past Tuesday. The 30-year long-bond yield similarly hit a high of 3.787% Friday, sharply above its Tuesday low of 3.53%. Right now it looks like most of the big gains in the bond market are over, although Ben Bernanke & Co. will continue to stand vigilant over the possibility of a deflationary scenario being played out. The best bet right now appears that we’ll continue to be in a ‘low interest’ rate environment for the foreseeable future. Speaking of economic conditions in our own backyard, my wife and I had the privilege of staying with some friends on Ono Island this past week, which is a huge ‘treat’ for a guy who grew up in ‘land-locked’ Fargo, North Dakota. However, by the constant signs of the lengthy waiting lines for the restaurant and entertainment scenes, you certainly couldn’t tell that we were supposedly in the midst of the worst recession since the Great Depression. And the constant parade of ‘champagne-encrusted’ yachts going up and down the intercoastal waterway was definitely another sign that individuals still have ‘discretionary’ purchasing power, along with the fact that I grew up on the ‘wrong side of the tracks.’ All I can say is it’s nice to have friends in ‘high places.’

Sources:  Barron’s, The Wall Street Journal, The Kirk Report, Kiplinger’s, The New York Times, Associated Press, Reuters, Morningstar

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