The Bipolar Markets Turn Depressive

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Markets continued their bipolar tendencies this past week and actually turned depressive come last Friday as a global sell off occurred as to the troubles with the European Union, and the muted response to President Obama’s job creation program. It didn’t help to have one of Germany’s top representatives with the European Central Bank’s executive board resign over the tactics of the European Central Bank. Plus, a rumor that the country of Greece would default on its debt over this past weekend was just the icing on the cake. All of these events sent both the U.S. and European stocks into a tailspin.

As the wild fluctuations in the equity markets continued, the problems across the pond certainly overshadowed the $447 billion jobs program that President Obama unveiled this past Thursday before a joint session of Congress. The Dow Jones Industrial Average fell 2.7% that following Friday alone, and now has the Dow sitting below the psychologically important 11,000 mark. The Dow’s 4.08% decline in the first three days of September is its fourth worst three-day start going all the back to 1900. For the week, the Dow gave up 248.13 points or 2.21%. Meanwhile the Standard & Poor’s 500 dropped 1.68% on the holiday-shortened week to a level of 1,154.23. The tech-laden Nasdaq fared noticeably better as it only lost 0.5% to the 2,467.99 mark. The smaller-cap stocks as represented by the Russell 2000 didn’t fare much better than the overall market, as it gave up 1.38% on the week and now sits at the 673.96 level.

On a year-to-date basis, the major equity indexes are looking rather bleak. Thus far for 2011, the Dow Jones Industrial Average index is off 5.06%; the Standard & Poor’s 500 is off by 8.22%; the Nasdaq Composite index is down 6.97%; and the Russell 2000 is off an atrocious 14.00%.As we mentioned last week in our commentary, September is historically a tough month for the markets, but according to the Bespoke Investment Group, it gets even worse when the first few days of the month produce losses. The Dow’s 4.08% decline in the first three days of September was its fourth worst three-day start going back to 1900. When the market declines by 2% or more in the first three days, it has averaged a 6.31% decline for the remainder of the month. According to the Bespoke Group, in the three other years when the market fell by 4% or more in its first three days of September trading, the results get even worse: an average decline of 1.3.5% through the rest of the month. In 1946 the loss over the remainder of September was 4.83%. In 2002 it was 8.335%, and in 1931, it was a stunning 27%. Let’s just hope that history doesn’t repeat itself over the course of this month.Even as stocks were getting hammered around the globe, investors continued to flock to the safety of our U.S. Treasuries. As the dollar soared and with the euro falling to a six-month low, the benchmark 10-year note yield ended the week at a level of 1.92%, down seven basis points on the week. Meanwhile, the 30-year yield also sank to a new low of 3.245%, down five basis points from the previous Friday, when the long bond had a huge rally that day in reaction to the shocking news that the U.S. economy had failed to generate any jobs whatsoever in the month of August. On the shorter end of the yield curve, the two-year note yield also hit a new low of 0.177%, a dip of 3.3 basis points on the week. All of these anemic yields can be attributed to the fact that the Federal Reserve will stick to its declaration that it plans to keep its federal-funds rate target near zero through mid-2013. To show you the dichotomy of what’s’ going on around the world, consider that yields on Greek two-year notes climbed as high as 48%, and 10-year Greek paper is now yielding 18%!Looking ahead to economic news this week, most of the major stories will be in the latter part of week. On Wednesday we get the August producer price index figures as well as the August retail sales report and July business inventories. Come Thursday, we get the August industrial production number, which has the consensus calling for a meager 0.1% gain. Also on Thursday is the release of August consumer price index and the August capacity utilization tallies. We close out the week with the University of Michigan consumer-sentiment index for September on Friday, which will more than likely come in at a lackluster reading of 55.7.

In closing, look for another week of wild fluctuations as we all contend with the doubts as to Greece’s ability to remain solvent. Over the weekend, there were comments out of the European Union that it is doubtful that the country of Greece can be saved from bankruptcy. Currently officials in the Greek ministry are reviewing scenarios for handling such a situation, which is sure to cause increased volatility for equities around the globe. All we can say from Money Management Services, Inc., is that we’ll be monitoring the situation very closely. In the meantime, take care and please do not hesitate to get a hold of us with any questions or concerns.

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


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