Stocks got off to a volatile start in the first days of October with the S&P 500 down nearly 3% on the week by Thursday before recovering most of its losses by Friday afternoon. On Thursday, markets were disappointed that European Central Bank (ECB) President Mario Draghi failed to deliver more specifics on the size of its plan to buy asset-backed securities. Markets have been under pressure for the last couple of weeks from Europe’s weakening economic data and concerns over slowing global growth in general, and that has left some to wonder if the “buy the dips” psychology of the last few years was starting to change. But Friday’s stronger U.S. jobs data for September, and upward revisions for both the July and August jobs numbers, have turned the tide for U.S. equities. We’re coming into what is historically a strong seasonal period for U.S. stocks, and for some perspective, in January and July we experienced a 6% and a 4% selloff in the S&P 500 that lasted 13 and 11 days. Thursday was day 11 of the recent pullback in U.S. equities before the sharp reversal rally end the week.
For the week, the S&P 500 fell -0.75%, the Dow Jones Industrial Average lost -0.60%, and the MSCI EAFE (developed international) dropped -2.17%.
Here are the 3 stories this week that rose above the noise:
German Industrial Output Drops Most Since 2009 in August
Evidence of sagging momentum in Europe’s largest economy continues to mount, as detailed in a recent Bloomberg article. The latest disappointing data on the German economy is a report that industrial production dropped 4 percent in August, the biggest decline since January 2009. The slowdown in the German economy is being driven by a stalling recovery in the euro area and ongoing political tension with Russia.
The European Central Bank (ECB) has enacted unprecedented steps in an attempt to revive economic momentum in the region, but growing signs of weakness are calling into question whether the ECB’s actions will be enough to revive growth in the region. The latest data indicates growth in Europe remains a potential headwind for the global recovery.
Stocks Typically Pop After Mid-Term Elections
One reason for optimism over the outlook for equities into 2015 is the historical tendency for the market to do well in the six months after mid-term elections. This article has a concise summary of the historical data for this seasonal period and some theories on why equities have tended to perform well following the uncertainty associated with mid-term elections.
It is important not to overemphasize the explanatory power of the election cycle given a limited sample size, but equities are entering a period in which normal seasonality and the political cycle have historically tended to be a net positive.*
*Past performance is no indication of future results.
I.M.F. Lowers World Growth Forecast, Pointing to U.S. as a Bright Spot
The International Monetary Fund (IMF) cut its forecast for 2014 global growth down to 3.3 percent from 3.7 percent, and reduced its forecast for 2015 to 3.8 percent. The IMF pointed to weaker growth in China, Europe, Japan and Latin America (Brazil in particular) as the main drivers of the decline.
The possibility that the euro area could fall back into recession and the slowdown in large, emerging-market economies like China and Brazil were issues of primary concern. In contrast, the outlook for the U.S. economy was revised sharply upward, to 2.2 percent this year from 1.7 percent as the United States economy was set to outpace many large economies, not just in terms of growth, but also in corporate profitability and international competitiveness.
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.
