Weekly Market Recap: 15 Reasons the Dow Tanked 6.4% and Oil Spilled 9.2%
Dow 10,771 S&P500 1,136 Nasdaq 2,483 Gold 1,642 Oil 80
The Dow (NYSE:DIA), S&P (NYSE:SPY), and Nasdaq (NASDAQ:QQQ) dropped precipitously this week on fears over European banks, China’s (NYSE:FXI) economic slowdown, and a lighter than expected QE3. On the commodities front, Oil (NYSE:USO) dove almost 10%. Even high flying Gold (NYSE:GLD) and Silver (NYSE:SLV) took a serious spill.
Hot Feature: What’s Next for Gold?
Now, for our analysis of the 15 reasons markets moved this week:
1) Obama. President Obama proposed $1.5 trillion in new taxesthis morning as part of over $2 trillion in deficit-reduction measures he is urging a 12-member joint committee of Congress, set up as part of the August 2 debt deal to come up with another $1.5 trillion of deficit reductions over the next decade, to enact. The president hopes the group will make more cuts than the original package stipulates, and will do so largely through new taxes on the wealthy. While the plan is receiving lots of popular support, it doesn’t have the backing of the Republican party, which has accused the president of waging “class warfare” with his one-sided tax hikes, and with Republicans leading the House of Representatives, Obama’s plan could go the way of all other large deficit-reduction plans proposed in July ahead of the August 2 deadline for a deal.
2) Greece. The country continues to be a sore spot for investors and the global economy, as the world awaits a decision on whether Greece will receive its next tranche of aid, allowing it to put off default a bit longer. Markets opened down this morning as they awaited news from EU and IMF inspectors on whether Greece had fulfilled the terms of its bailout package, instituting the necessary deficit reductions. While inspectors were to finish that finish their assessment today, a decision on whether Greece will receive its next tranche of aid has yet to be made, and without it, Greece’s government could go into default within weeks.
3) Healthcare. As part of his proposed deficit-reduction measures, President Obama is seeking $320 billion in cuts on U.S. government healthcare spending. Drugmakers will be deal two blows if Obama’s plan is approved. The first blow would be dealt by Obama’s proposal that the window of market exclusivity for drugs be reduced from 12 years to seven. The second aspect of the plan would require makers of brand-name drugs to give a 23% rebate to the government for low-income Medicare beneficiaries receiving a subsidy to pay for coverage, according to two senior administration officials who wish to remain anonymous. General drugmakers would have to give a 13% rebate. Pfizer (NYSE:PFE), Merck (NYSE:MRK), Johnson & Johnson (NYSE:JNJ), Abbott Labs (NYSE:ABT), and many other of the nation’s top pharmaceutical companies are trading down today on the news.
1) Italy. Standard & Poor’s cut Italy’s credit rating late Monday by one level to A from A+, citing weak economic growth and criticizing Rome’s response to the debt crisis. Italian Prime Minister Silvio Berlusconi responded, saying that the move was influenced by “political considerations” and media stories rather than economic reality. Markets quickly shrugged off the news, with major indices in Italy, Germany, and London all opening higher this morning.
2) Bernanke. Goldman Sachs (NYSE:GS) provided a preview of what investors could see tomorrow from the Federal Reserve, saying there is a “high probability that the FOMC will announce further easing steps at the conclusion of this week’s meeting.” Goldman went on to say that Operation Twist looks “very likely” and that, “As a complementary measure, we also expect that the committee will announce a cut in the interest on excess reserves (IOER) rate to 0.1% from 0.25%, although this is a much closer call. An IOER cut would lower market interest rates a small amount and could aid communication.” The expectation of good news buoyed markets despite a day full of negative or at least neutral economic data, and had the major indices climbing high in mid-day, though they’ve since declined toward more reasonable levels, given that the IMF announced today that it had lowered its global economic forecast for 2011 and 2012, with growth in Europe and the U.S. stalling.
3) Housing. Both housing starts and completions declined in August from already depressed numbers, according to a monthly report by the Department of Urban Housing and Development, in conjunction with the U.S. Census Bureau. However, building permits increased last month, which means more projects are likely to start within the next six months. The news had building stocks climbing higher, including Toll Brothers (NYSE:TOL), D.R. Horton (NYSE:DHI), KB Home (NYSE:KBH), PulteGroup (NYSE:PHM), Hovnanian Enterprises (NYSE:HOV), and The Ryland Group (NYSE:RYL) all outperforming the major indices.
1) Greece. The country’s sovereign debt crisis continues to be a drag on markets. Though it now seems likely Greece will receive its next 8 billion-euro loan payment, economists say that is only enough to prevent default for a few months. Meanwhile, the IMF has recognized the need for banks to boost their capital in order to withstand potential losses incurred by the sovereign debt crisis sweeping Europe. And with private investors wary of putting their money in unstable financial markets, public authorities may have to get involved. Just today, ING (NYSE:ING) announced that it has substantially cut its holdings of Italian debt in hopes of placating investors nervous about the firm’s exposure to the European sovereign debt crisis.
2) Banks. Moody’s went on a cutting spree, lowering its rating on Wells Fargo (NYSE:WFC) from A1 to A2, as the ratings firm thinks it’s unlikely the government will step in to support banks the way it did in 2008 should things get rough again. For that reason, Moody’s also downgraded Bank of America (NYSE:BAC) from A2 to Baa1. While Moody’s maintained its rating on Citigroup’s (NYSE:C) stand-alone credit profile, it downgraded its holding company’s short-term rating from Prime-1 to Prime-2. Not to be out done, Standard & Poors (NYSE:MHP) cut its ratings on 15 Italian banks following its downgrade of Italian debt yesterday. Shares of other financial giants, including J.P. Morgan (NYSE:JPM), Morgan Stanley (NYSE:MS), and Goldman Sachs (NYSE:GS), all reached new 52-week lows.
3) FOMC. Markets moved sharply lower this afternoon following an announcement from theFederal Open Market Committee that the Federal Reserve will replace some bonds in their portfolio with longer-term Treasuries in an effort to reduce borrowing costs. The central bank will buy $400 billion worth of bonds with maturities of six to 30 years between now and June 2012, while simultaneously selling an equivalent amount of debt maturing in three years or less as part of what’s being called “Operation Twist.” But experts question whether the move will be effective in encouraging businesses and consumers to put more money into the economy, especially considering that interest rates have been near record lows since 2008 but have yet to entice consumers to take out loans.
1) Fed. Markets plummeted today following dire remarks on the economy from the Federal Reserve. The news of slowing growth also pushed most commodities lower, including oil, gold, and silver, while only Treasuries moved higher as investors sought one of the few safe havens left. The Fed’s announcement of Operation Twist yesterday failed to instill much confidence in the economy, and few think the measures will be enough to reverse the economic downswing over the last few months. After all the anticipation leading up to the Fed’s decision, investors were left with the understanding that not even the Fed has the power to turn this thing around.
2) China. Through all the economic turmoil that has engulfed the globe over the last few years, China has been the one shining beacon of progress and growth. However, despite the fact that China’s economy is still on track to grow 8.5% to 9% this year, its manufacturing sector has been contracting for the last three months now, according to HSBC’s manufacturing PMI. There was a lot of concern over China because heretofore it’s been the one pocket of unstoppable strength in the global economy,” said Paul Larson, chief equity strategist at Morningstar. “If that stops and China becomes a drag on worldwide growth, it could have big implications here in the U.S.” News that China might not be as infallible as once though had a host of popular Chinese stocks plummeting today, including shares of Sohu.com (NASDAQ:SOHU), Youku.com (NYSE:YOKU), RenRen (NYSE:RENN), Sina Corp. (NASDAQ:SINA), and Baidu.com (NASDAQ:BIDU), which fell nearly 11% today.
3) Banks. After Moody’s downgraded some of the nation’s top banks yesterday, investors are growing worried about the financial industry’s exposure to the sovereign debt crisis in Europe. Not only were Bank of America (NYSE:BAC), Wells Fargo (NYSE:WFC), and Citigroup (NYSE:C) continuing to slide today after Moody’s downgraded them, citing the unlikelihood that the government will step in should the financial sector find itself in a similar situation to that of 2008, but the entire sector fell on concerns that Moody’s was right. Barclays (NYSE:BCS), JPMorgan (NYSE:JPM), Goldman Sachs (NYSE:GS), and Morgan Stanley (NYSE:MS) were all heavy drags on the markets today. European banks were trading sharply lower for the same reason, with France’s SocGen and Credit Agricole falling 9.5% each, while Deutsche Bank (NYSE:DB) and Credit Suisse (NYSE:CS) also underperformed the markets.
1) Europe. Group of 20 finance chiefs have pledged to take action in combating the global economic slowdown and tackling Europe’s sovereign debt crisis. The market is still not convinced the Eurozone will remain intact, but there was enough rhetoric to keep markets floating into the weekend after yesterday’s bloodbath.
2) Precious Metals. Precious metals got absolutely killed today. Gold (NYSE:GLD) lost nearly one Benjamin while Silver (NYSE:SLV) dropped 15%. Wow! Speculators looking for an all-out paper printing event from the Federal Reserve seem to be covering their bets.
3) Tech. Shares of Hewlett-Packard (NYSE:HPQ) are trading lower today after Meg Whitman has been named to replace Chief Executive Officer Leo Apotheker. Whitman did a great job as CEO of Ebay, but experience actually matters and she has none where it counts for HP. In other tech news, Apple (NASDAQ:AAPL) launched its largest retail store in Asia in Shanghai today — the same day rumors surfaced availability of the iPhone 5 may be limited due to defective touch panels. Lastly, A new poll from The Street shows that 42% of Netflix (NASDAQ:NFLX) subscribers plan to fully cancel their subscriptions following the rise of Qwikster.