Is the glass half full or half empty for US Markets?

Is the glass half full or half empty for US Markets?


Markets declined last week, retreating after initial third quarter earnings reports showed weakness and the World Bank cut its growth estimates in Asia. While the major indexes rallied a bit on Thursday and Friday, overall, investors decided that they didn’t have much to get excited about. For the week, the S&P declined 2.21%, the Dow lost 2.07%, and the Nasdaq lost 2.94%.



While it is can be hard to see the big picture when markets slide, it’s important to keep short-term pull-backs in perspective. To help us do this, we can reflect on how far we’ve come since Tuesday’s five year anniversary of the October 9, 2007 peak. In the last five years, markets have overcome a great deal: a catastrophic mortgage meltdown, a plunge that erased 50% of the market’s value, and significant global uncertainty. Since the darkest days of the “great recession” we’ve made enormous strides towards recovery, and currently, the S&P is within a few percentage points of its 2007 peak. Furthermore, we have reasons to be optimistic about the future. While we could hope for more robust growth, economic indicators are showing that the economy is gradually recovering. Unemployment is decreasing, manufacturing is increasing, and consumers are feeling more confident.



We definitely have a long way to go before we can state with certainty that the global economy has recovered. And, as many analysts have stated, the next few months could be turbulent for equity markets. Factors such as the ongoing crisis in Europe, weak fundamentals in Asia, poor corporate earnings reports, the presidential election, and the fiscal cliff may create challenges that test your discipline to stay the course.



On the bright side though, the S&P 500 has gained 11.8% since June 1, indicating that investors are ready to respond to positive news and that there may still be some upside potential this year. In September, the U.S. economy gained 114,000 jobs, driving the unemployment rate down to 7.8%. The housing market is active, indicating that at least that corner of our economy is doing well. Although we cannot predict the future, these factors are very encouraging. We’ve certainly come a long way.



HEADLINES:

Eurozone seeking ways to cut Greek debt. Eurozone officials are seeking alternative ways to address Greece’s woes as recession and reform delays have put their original debt targets out of reach. After lending over 25 billion euros, central banks are reluctant to offer lower interest rates or purchase additional Greek debt.

China’s weak imports signal recovery is slow. China’s import growth recovered slightly in September but was still well below targets. Imports grew 2.4% in September, and exports, a major component of China’s GDP, grew by a robust 9.9%, despite continued weakness in the U.S. and Europe.

Mortgage lenders report record profits. In the latest sign that the housing market has turned the corner, the country’s largest mortgage lenders, Wells Fargo and JPMorgan Chase, reported that a surge in lending has resulted in record profits last quarter. Lower interest rates are promoting refinancing as well as mortgages for new homes.

U.S. producer prices rise in September. U.S. producer prices, a measure of inflation, rose 1.1% in September, following a 1.7% increase in August. The increase is due to rising energy costs. Though wholesales prices rose, core inflation remained steady, reducing concern about rising prices.



QUOTE OF THE WEEK:

"I am certain that after the dust of centuries has passed over our cities, we, too, will be remembered not for victories or defeats in battle or in politics, but for our contribution to the human spirit.”- John F. Kennedy





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The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The DJIA was invented by Charles Dow back in 1896.

The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indexes from Europe, Australia and Southeast Asia.

The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

The Housing Market Index (HMI) is a weighted average of separate diffusion indices based on a monthly survey of NAHB members designed to take the pulse of the single-family housing market. Each resulting index is then seasonally adjusted and weighted to produce the HMI.

The Pending Home Sales Index, a leading indicator of housing activity, measures housing contract activity, and is based on signed real estate contracts for existing single-family homes, condos and co-ops. The PHSI looks at the monthly relationship between existing-home sale contracts and transaction closings over the last four years. The results are weighted to produce the index.

The Chicago Board Options Exchange Market Volatility Index (VIX) is a weighted measure of the implied S&P 500 volatility. VIX is quoted in percentage points and translates, roughly, to the expected movement in the S&P 500 index over the upcoming 30-day period, which is then annualized.

The BLS Consumer Price Indexes (CPI) produces monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services. Survey responses are seasonally adjusted and weighted to produce a composite index.

The Conference Board Leading Economic Index (LEI) is a composite economic index formed by averages of several individual leading economic indicators, which are weighted to produce the complete index.

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