Calm on Wall Street: A turbulent week ends on a placid note

30 Aug 2015 | Author: | No comments yet »

Global Stock Markets Surge, Ending Days of Huge Losses.

It was a brutal week that finished with a relatively happy ending for people paralyzed with fear about the stock market, but a disaster for some who tried to escape danger at any cost.Violent market swings sent the S&P 500 into correction territory over a four-day period that began last Friday, while other markets around the world fared just as badly.

In a volatile trading session in New York, the Standard & Poor’s 500, Dow Jones industrial average and NASDAQ composite index each gained well over 2 percent. Despite a horrifying 1,100 point plunge at the start of the week, and more nail-biting downturns later, by the close on Friday the damage was not nearly as bad as you might have imagined. The gains, all recorded in the last 45 minutes of trading, helped investors recover some of the 23 percent in losses sustained over the previous five days.

After being down 1,100 points stocks began to climb, and at a point when the Dow was down only about 150 points, people might have assumed they would bail out and escape any future danger. However, none of the factors that drove investors to sell have gone away, so there will likely be more volatility and weakness in the weeks and months ahead. That apparently was an effort to stabilize the market ahead of the September 3 military parade celebrating the 70th anniversary of the World War II victory over Japan.

People with mutual funds often don’t realize that when they get cold feet about 401(k)s or any other investments, they can’t just get out of their funds on a moment’s notice. Over a longer period, the Chinese market had tumbled 42 percent since its mid-June peak, erasing more than $5 trillion in value as traders worried that the stock values were too high, with prices unjustified by China’s slowing economy.

So last Monday, a person might have decided to bail when stocks were down just 150 points around noon, but the loss they had to take was more like 600 points because that was the carnage in stock funds by the end of the day (4 p.m. eastern time when the market closes). To make matters worse, since nervous people sold their funds at the worst of times, they didn’t get the benefit of the recovery that came late in the week. As Gluskin Sheff + Associates Inc. chief economist and strategist David Rosenberg pointed out, it’s understandable that markets see China’s economy as being in worse shape than anyone anticipated given that Beijing devalued its currency for the first time since 1994. When the People’s Bank of China on Wednesday gave investors what they wanted by cutting interest rates and the amount of reserves large banks must hold — the fifth such move in the past nine months — global markets stormed higher. But China’s actions raise the possibility that rather than being influenced by economic considerations, it is increasingly being driven by what financial markets want.

And Alan Valdes at DME Securities blamed the market volatility on lower volumes typical of the summer months, coupled with uncertainty and eroding confidence about Beijing’s monetary policies. People yanked $29.5 billion out of stock funds during the week through Thursday, the largest move on record since 2002, according to analyst Michael Hartnett of Bank of America Merrill Lynch. And, in this case, investors should be careful what they wish for. “So China is the second largest economy in the world,” Rosenberg said. “From 1968 to 2010, it was Japan and somehow, we all managed to survive its frequent dives into recession over the past quarter century.” Chinese authorities could have more surprises in store for the markets, but before then, investors will probably be more concerned about picking through Fed vice-chair Stanley Fischer’s speech on Saturday at the annual Jackson Hole, Wyo., conference for clues on interest rate policy. Beijing unexpectedly allowed the yuan to weaken earlier this month, raising concerns Beijing was worried about its exporters, who have helped drive its massive economic growth.

On Thursday, China’s central bank set its central rate for the yuan at a four-year low, at 6.4085 against the U.S. dollar, or about .07 percent weaker than the previous day. The value of the funds fell precipitously before the selling actually could be completed, so people ended up losing far more money than they expected.

Analysts are not sure what to expect for the weeks ahead, and say that more worries about China and the Federal Reserve raising interest rates could cause more downturns. That means you might decide when you’ve lost 5 percent to sell, but maybe end up losing 10 or 20 percent by the time your order actually is concluded.

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