Market Perspective for October 3, 2014

The indexes rallied on Friday, reducing the weekly losses. For the day, the S&P 500 gained 1.11 percent, while the Dow Jones Industrial Average increased 1.24 percent.  The Nasdaq and Russell 2000 also participated in the rally, gaining 1.03 and 0.76 percent, respectively.  For the week, the S&P 500 Index lost 0.75 percent, while the Dow Jones Industrial Average dropped 0.60 percent. The Nasdaq, lost 0.91 percent. The Russell 2000 remains continues to underperform, retreating 1.23 percent.

Friday’s rally was fueled by the announcement of the unemployment rate falling to 5.9 percent, the lowest level since 2008. The decline was spurred on by the addition of 248,000 jobs in September. Revised numbers for July and August indicated that 69,000 more jobs were created than originally thought. Because the Fed considers 5.5 percent unemployment to be healthy, if the number holds or declines further, it may be a catalyst for the Fed to raise interest rates.

Global growth was the explanation given for overall weakness in stocks this week, though most of the losses were a continuation of the trend from late September and came early in the week, led by the slumping Russell 2000 Index of small cap stocks. Many assets reversed course, including the U.S. Dollar Index and high yield bonds, and on Thursday, the Russell 2000 also bounced sharply. These moves could be the beginning of a rally following September’s selling, especially due to the reversal in the U.S. dollar. The greenback has been weighing heavily on commodities and emerging markets, providing an extra headwind on top of concerns of slowing growth.

The initial move early in the week was tied to weakness in China, as falling home prices and a slowing economy are weighing heavily on emerging markets. Even though China is still growing at a very fast rate relative to most economies, investors priced in that growth and in many commodity markets, Chinese demand represents the marginal demand. Many mines went into overdrive to produce iron ore, for example, but as Chinese steelmakers shut production, iron ore demand collapses. Other commodities such as copper are at risk, and the oil market could be next if growth slows even more during the fourth quarter.

In contrast to slowing growth in China, the U.S. economy is still showing solid improvement. The manufacturing PMI for September slowed a bit from August, but it is still significantly ahead of the global economy. Strong energy production is helping the manufacturing sector, both from cheap energy and from the demand for equipment and supplies that power the energy revolution. This is good news for the economy and the U.S. dollar in the long-run, but for now, the stronger U.S. dollar is trouble for global markets.

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