Dow 11,269 S&P500 1,178 Nasdaq 2,507 Gold 1,746 Oil 85
The Dow (NYSE:DIA), S&P (NYSE:SPY) and Nasdaq (NASDAQ:QQQ) took investors and traders on a roller coaster ride this week. Dow tech component Cisco Systems (NASDAQ:CSCO) was a catalyst for the market rebound following a better-than-expected quarterly earnings release. Also, Gold rose 5% over the week as the Fed reiterated they will keep interest rates low until 2013.
Now, for our analysis of the 15 reasons markets moved this week:
1) S&P. Late Friday, Standard & Poor’s downgraded the credit rating on U.S. government debt for the first time. While bond prices actually gained despite the news, and foreign investors reaffirmed their confidence in U.S. Treasuries, the news still caused widespread panic, and global markets took a beating as people flocked to safe havens like gold, which climbed above $1,700 an ounce today. Fannie Mae and Freddie Mac were also downgraded, leaving some investors afraid that interest rates on mortgages could spike. The day was a ‘sell now, ask questions later’ kind of day that had investors fleeing without any true understanding as to why. Even President Obama’s mid-day speech in which he said, “Our problems are imminently solvable,” wasn’t enough to save markets from their single worst day of trading since 2008.
2) ECB. With the downgrade casting a dark shadow over global markets, it didn’t much matter that the European Central Bank began buying Spanish and Italian bonds, pushing down yields and alleviating fears that Spain’s and Italy’s debt crises would continue to barrel on, out of hand, without any real efforts being made to stop them. Combined, Spain and Italy account for nearly 30% of the euro zone’s gross domestic product, so while the ECB will have to buy billions more euros worth of sovereign debt, it’s a necessary measure in order to prevent Spain’s and Italy’s floundering economies from contaminating fellow members of the European Union. But while the positive news that the ECB took a big step forward in beginning to buy Spanish and Italian bonds gave European markets a small boost in the morning, Standard and Poor’s news had a major depressing effect on markets around the world.
3) BAC. As one of the day’s most heavily traded stocks, Bank of America’s (NYSE:BAC) huge decline today helped push the Dow below 11,000 for the first time since November of last year. Bank of America’s share price had fallen over 20% by the time markets closed Monday on news that AIG (NYSE:AIG) was suing the bank for over $10 billion for allegedly overvaluing residential mortgage-backed securities it sold to the insurance company between 2005 and 2007. Other banks (NYSE:KBE) such as Citigroup (NYSE:C), JP Morgan (NYSE:JPM), Wells Fargo (NYSE:WFC), and Goldman Sachs (NYSE:GS) also took huge blows.
1) Fed. While many stocks were making up for Monday’s losses at a frenzied pace, the Federal Reserve’s announcement this afternoon that it will likely keep interest rates at record lows through mid-2013, citing weak economic growth as well as more temporary factors, like the Japan crisis and high oil prices, temporarily reversed the upward trend. While the news means investors have another year more than previously expected to take advantage of near-zero interest rates, stocks began to fall off after the announcement, maybe because investors were hoping the Fed would do more — QE3 anyone? — or maybe the Fed’s decision to extend low borrowing costs for two more years renewed fears about the economy’s non-recovery. Either way, markets continued to rally after yesterday’s mass sell-off left many valuable stocks ripe for the picking.
2) Oversold. Today’s market gains don’t necessarily represent increased confidence in the market, but rather confidence in individual stocks, many of which became oversold in the last few weeks as fearful investors fled. The S&P 500 was more technically oversold than it has been in the last 10 years, with its 14-day relative strength index down to 16.5%. Anything below 20% generally attracts buyers. The perfect example is Exxon Mobil (NYSE:XOM). Apple’s (NASDAQ:AAPL) market capitalization actually rose above Exxon’s today, despite the fact that Exxon’s annual revenue is four times that of Apple. Though oil prices have been sinking lately, the stock still remains highly profitable for investors. After falling 7.97% in the last five days of trading, XOM shares reversed this afternoon, climbing 2.07%.
3) Banks. With Citigroup (NYSE:C) and Bank of America (NYSE:BAC) leading the way, financials rallied today after Monday’s huge sell-off. The financial sector went from being the worst performing of all 10 sectors on the S&P 500 Monday, to the best performer today. While the Fed’s announcement in the early afternoon caused a slight hiccup in otherwise solid sector growth, financial stocks quickly recovered, climbing higher still. After markets closed on Monday, Standard & Poor’s assured investors that it had no plans to downgrade the banking sector, and in fact, expects higher earnings, improved asset quality and capital in the third quarter.
1) France. With one of the largest economies in Europe, second only to Germany, France’s downfall would mark the downfall of many. So far France and Germany have seemed relatively safe compared to smaller countries like Greece and Portugal, and even larger countries like Italy and Spain, where the debt-to-GDP ratio far exceeds that of the EU’s stronger members. But France’s budget deficit has been steadily rising, and now the country’s AAA rating could be in danger. French President Nicolas Sarkozy must now do what the U.S. could not: enact a deficit-reduction plan that satisfies all of the major ratings agencies in order to avoid a downgrade. French bank stocks were trading markedly down today on rumors of a possible downgrade, while the cost of insuring French debt rose to a record high. France’s major stock index ended the day down 5.5%.
2) Recession, part 2. It’s looking more and more likely that the U.S. could fall into another economic recession, this one worse than the last. A survey of economists showed that the likelihood of another recession increased from 15% to 25% in just a few weeks. And many are arguing that another recession, while the economy is still not fully recovered from the last, could be even worse. Furthermore, with the 2012 elections around the corner and the government agreeing to cut spending, it’s unlikely another stimulus plan will help buoy the economy, which means the next recession could actually be a depression. Markets are already at their lowest levels this year, with the Dow down almost 2,000 points just in the past two months, and the S&P 500 down 10.88% for the year
3) Banks. No sector is so volatile as the financial sector (NYSE:XLF). On Monday, when markets had their worst day in nearly 3 years, guess which sector performed the worst on the S&P 500? And on Tuesday, when markets rallied, guess which sector performed the best? Now today, as markets reverse yet again, giving up yesterday’s gains, banks continue to be the biggest drag, with Bank of America (NYSE:BAC), Citigroup (NYSE:C), and Goldman Sachs (NYSE:GS) leading the way, all falling over 10% during regular trading. Not far behind were Wells Fargo (NYSE:WFC), Morgan Stanley (NYSE:MS), and PNC Financial Services (NYSE:PNC). The sector’s best performer was JPMorgan (NYSE:JPM), giving up 5.58% of its share price.
1) Jobless claims. Initial unemployment benefits claims fell below the 400,000-mark for the first time last week in nearly four months, a mark that is very important because anything below it means the market is growing — that more jobs are being created than eliminated. The last time weekly initial jobless claims were below 400,000 was April. The news is a positive follow up to Friday’s Labor Department report that had the economy adding 117,000 jobs in July, and would seem to prove that the economy is slowly but surely beginning to improve, despite so much recent evidence to the contrary.
2) Italy. The economies and markets of Europe and the U.S. are inextricably linked, or at least have been of late. One’s sovereign debt crisis is felt by all, another’s downgrade is felt overseas — such has been the case for months, with U.S. stocks tending to mirror European stocks, which get an earlier start on the day, but also vice versa. Today, CNBC reported that Italy (NYSE:EWI) might place a ban on “naked” short selling, in which investors sell a financial instrument without first borrowing it. The news relieved some stress on the country’s markets, and ultimately European stocks finished higher, despite the weight of France’s (NYSE:EWQ) increasing deficit, and worries that the second-largest euro-zone economy could be in danger of a downgrade.
3) Cisco. After a better-than-expected earnings report, Cisco Systems (NASDAQ:CSCO) led networking and telecom hardware stocks in strongly outperforming the Nasdaq. Among some of the biggest gainers were Cavium Inc. (NASDAQ:CAVM), JDS Uniphase (NASDAQ:JDSU), and NetLogic Microsystems (NASDAQ:NETL), all climbing over 11% today.
1) Retail sales. In July, retail sales posted their largest gain since March, climbing 0.5% according to the Commerce Department, which released the sales data this morning. Considering that consumer spending accounts for roughly 7o% of the economy, a 0.5% increase in retail sales bodes well for the economy.
2) Short-selling ban. France (NYSE:EWQ), Italy (NYSE:EWI), Belgium, and Spain (NYSE:EWP) all enacted short-selling bans in order to stabilize European markets amid fears that their banks, especially those in France, are falling short on funding and could be facing downgrades in the near future. Before the movie, European bank stocks were down to their lowest market valuations since the financial crisis. The ban seems to have had its intended effect, with European markets trading up today, especially French bank stocks like BNP Paribas and Societe Generale, both of which have declined significantly in the last month. However, that effect may not last, as short-selling bans tend to be a sign of panic, and a last resort for regulators.
3) Capital goods. The capital goods sector (NYSE:XLI) made a particularly good showing today, with gainers far outweighing losers. Some of the most heavily traded stocks today included Caterpillar (NYSE:CAT), Boeing (NYSE:BA), Honeywell (NYSE:HON), and United Technologies (NYSE:UTX). Dresser-Rand Group (NYSE:DRC) was the best performer in terms of percent gains in the capital goods sector, climbing nearly 7% today.