This week was won by the bears as the major indexes retreated, in part due to Apple (AAPL). The firm saw a couple of glitches, one involving a software update for the iPhone and another claim that the new phones bend. Shares of AAPL slumped 3.8 percent, and as the largest holding in the S&P 500 and Nasdaq, the hit was a drag on both indexes. The S&P 500 lost 1.37 percent on the week, while the Nasdaq slid 1.47 percent. The Dow Jones Industrial Average saw smaller losses, giving up 0.96 percent. The Russell 2000 continues to show weakness as it dropped over 2.50 percent on the week.
Stocks have been relatively flat over the past three months. Financials and healthcare have been the only two sectors seeing significant positive moves in September, and the dip this week took the S&P 500 back to early July levels. This has been a consolidation phase for the bull market and while some asset classes and markets are showing some potential warning signs, the U.S. stock market remains firmly in a long-term bullish uptrend.
Financial media had plenty of reasons to hype the weakness in stocks this week, but it looks like a natural correction with no specific event. Apple’s problems aren’t worse than anything they’ve dealt with before and we expect the problems will be corrected soon. This often occurs when new technology is released. Blame was also placed on Russia’s move to retaliate against American and European sanctions. Earlier in the week, data out of China also helped weigh on the commodity and emerging market segments.
The markets could be set for a return to bullishness soon, but it may mean a weaker U.S. dollar. The stronger dollar has been weighing most heavily on emerging markets already reeling from concerns about the slowing Chinese economy. On the bright side, gold and gold mining shares refused to trade lower on Thursday and miners bounced off their major support level. This indicates some traders are betting on a reversal of the greenback soon.
While economic data was generally underwhelming for the global economy, China’s flash manufacturing PMI increased slightly. In contrast to weak data abroad, the U.S. flash PMI remains elevated, indicating continued expansion of the economy. The U.S. GDP growth rate in the second quarter was revised upward again, to a final estimate of 4.6, up from 4 percent initially and the 4.2 percent second estimate. The increase was helped by rising exports and growing inventories.
While we are seeing a pickup in volatility, patience remains important. We have had good performance over the first 9 months of the year; consolidation and profit taking will certainly occur. We continue to expect the fourth quarter to be positive for stocks.
Finally, it was reported yesterday that Bill Gross has left PIMCO to manage the Janus Global Unconstrained Bond Fund (JUCAX). In the upcoming Investor Guide to Fidelity Funds, we will be examining the impact on the PIMCO Total Return Bond Fund. If you have not yet subscribed to the Investor Guide to Fidelity Funds, please call us at (888) 252-5372 or visit www.mutualfundinvestorguide.com to begin your membership. The October issue will be available in just a few days.