Last week was a volatile one for U.S. stocks with the S&P 500 slipping by 1.6% on Thursday before stabilizing heading into the weekend. There was no single clear-cut catalyst for Thursday’s volatility, with geopolitical risks, the persistent strength of the U.S. dollar, hawkish Fed commentary, and general technical factors all cited as potential contributing factors. Fears of a deeper correction in risk assets heading into the fourth quarter were also exacerbated by continued weakness in small-cap equities and high-yield bonds. To put the selloff in context, however, most major global equity indices remain above rising 200-day moving averages, an indication that the uptrend in risk assets that has been in place since 2012 has yet to exhibit significant deterioration.
Economic data will move back to the forefront in the coming week headlined by the ISM Manufacturing Index on Wednesday and nonfarm payrolls on Friday.
For the week, the S&P 500 fell -1.37%, the Dow Jones Industrial Average lost -0.96%, and the MSCI EAFE (developed international) dropped -2.18%.
Here are the 3 stories this week that rose above the noise:
The U.S. Dollar is Top of the World
Heading into this week’s Fed policy statement, speculation has been high that a change in the statement’s language will signal a more hawkish stance. Although some recent economic data has been surprisingly strong, some moderation in the closely watched labor market and inflation data does not create a clear-cut case for a more hawkish Fed. If there is a change in Fed language, the motivation may be due to concerns over signs of excessive risk taking in financial markets.
An article from Institutional Investor summarizes a recent warning from the Bank of International Settlements, regarded by many as the central bank for central banks, that there are many signs of investors reaching for yield and becoming overly complacent about the path of future interest rates. If the Fed does shift to a somewhat more hawkish tone in the coming months, concerns such as those mentioned in the article, are likely to be the motivation.
Home Prices Rise at Slow Pace
Further evidence that the U.S. housing recovery has lost some steam in recent months was provided by this week’s S&P/Case-Shiller 20-city index of property values. The widely followed index showed a 6.7% year-over-year increase for the three months ending in July, which was the smallest gain since November 2012. The price increases came in well below the median projection of analysts and is the latest in a string of generally disappointing housing data reported during the third quarter.
However, as noted in the article, continued double-digit price increases are probably not sustainable and the current low inventory of available homes helps mitigate the risk of a broad decline in property values.
Americans’ Views of the Labor Market Deteriorates
Confidence among U.S. consumers unexpectedly declined in September to a four-month low, as the Conference Board’s Consumer Confidence Index decreased to 86.0 from 93.4 in August. The current reading fell short of the median Bloomberg consensus expectation of 92.5, representing the largest miss since January 2012.
The Conference Board’s Present Conditions and Expectation Indices both posted month-over-month declines. Concerns over the current labor market helped drive the reduction in confidence, as the share of respondents who said jobs were currently plentiful dropped from 17.6% to 15.1%, the weakest in three months. Additionally, fewer consumers expected more jobs to become available in the next six months.
Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.
International investing involves additional risk, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification.
