After plunging to eight-month lows by Wednesday, stocks stabilized and staged a significant rally on Friday to close with only modest weekly losses. A number of factors converged for the volatile start to the week, which saw the CBOE Volatility Index hitting a two-year high, the 10-year Treasury yield briefly fall below 2% for the first time since June 2013, and the 10-year German Bund yield plunge to an all-time low of 0.72%. The S&P 500 broke below its closely watched 200-day moving average on Monday for the first time since 2012, adding to recent signs of deteriorating market momentum.
Globally, continued weak data from Germany, renewed turmoil in Greece, and wild moves in European bond markets weighed heavily on European stocks. Fears that the Ebola virus will rapidly spread, although arguably somewhat irrational, were also cited as a catalyst for the market’s volatility. Domestic data seemed to play a role in Wednesday’s sharp decline, with reports on retail spending and regional manufacturing sentiment pointing to a worrisome reversal in economic momentum.
However, Thursday’s reports on initial jobless claims and industrial production showed a level of strength that was inconsistent with a sharply slowing domestic economy and helped to put at least a short-term bottom in equity markets and Treasury yields. Some dovish comments from central bank officials citing concerns over falling inflation expectations also seemed to help lift investor sentiment.
For the week, the S&P 500 fell -1.02%, the Dow Jones Industrial Average lost -0.99%, and the MSCI EAFE (developed international) dropped -0.65%.
Here are the 3 stories this week that rose above the noise:
Reasons to Calm Down About Ebola
Fears of a global Ebola virus pandemic have impacted markets recently as investors have become concerned about the virus’s impact on the global economy and, in particular, travel-related industries. While much remains unknown about the ultimate severity of the Ebola virus, an article from The Wall Street Journal provides some encouraging perspective.
It points out that Ebola is not particularly successful in humans by viral standards. HIV, to take a familiar example, has been killing more than two million people per year for almost two decades. Ebola has hitherto caused only small, localized outbreaks. The Ebola virus is not highly transmissible through proximity or casual contact as the influenza virus is.
Additionally, its current spread has been largely a result of poor local government response and inadequate funding in several African countries where the epidemic started. Nigeria provides an encouraging example of a country that has averted disaster through a rapid, well-coordinated government response to the outbreak which has contained the spread of Ebola in that country.
Mixed Economic Signals from China
With growth slowing in Europe and Japan, many investors are looking at China as one of the most significant wild cards in the global economy. However, assessing the health of the Chinese economy is a difficult task given mixed signals in the data. Chinese GDP increased by 7.3 percent in the third quarter, the lowest quarterly growth since the financial crisis in 2009. But compared to the rest of the world, this level remains well above the other major global economies.
While job growth continues at a strong pace, a disparity exists between an expanding service sector and a contracting manufacturing space. Other conflicting signals are seen within retail sales and trade data which further cloud the economic climate.
American Consumers See Windfall from Lower Gasoline Costs
Gasoline prices have dropped significantly since June and are now at their lowest level since January 2011. The sharp drop in gas prices should provide a boost to consumer confidence and spending. Gasoline accounts for roughly 3 percent of overall consumer spending and the drop in fuel prices may free up as much as $50 billion for consumers and provide a 0.3 percent increase in GDP over the next year, according to Deutsche Bank’s Chief U.S. economist Joseph LaVorgna.
It’s difficult to project gasoline prices over the next 12 months, but the price of gas typically declines between the summer and early winter. If history is any guide, gasoline prices may continue to fall through year-end.
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.
