S&P 500 posts best Sept. 30 performance in 7 years

1 Oct 2015 | Author: | No comments yet »

After Rough Quarter, Investors Buckle Up.

At the closing bell, the Dow Jones Industrial Average rose 236 points, or 1.5 per cent, to 16,285. In fact, Wednesday’s performance, which saw the broad stock index gain 1.9%, marked its best close to a third-quarter since 2008, according to Dow Jones data. The gains ended a third quarter that included the largest percentage declines for U.S. stock indexes and the most volatility since 2011, reflecting concerns about the pace of growth in China and elsewhere around the globe. The US market rallied during the session, but the market still suffered its worst quarter since 2011. “It would be healthy for the market to close strong today, just because we’ve seen some of these rallies fade,” Brett Mock, managing director at brokerage JonesTrading Institutional Services, said ahead of the strong finish.

But analysts said the relief could be temporary, and that many of the concerns that plagued markets in Q3, such as the slowing Chinese economy, have yet to be resolved. “The market selloff of the third quarter cannot be attributed solely to a shift in sentiment,” said Jon Scoffin, head of equity research at Barclays Capital. “It was the result of weak global growth, driven by deceleration in emerging markets, particularly in China.” China witnessed a shocking stock market crash in the third quarter, with the Shanghai Composite Index’s return going from one of the best on the year to a negative position. Many investors said the U.S. economy is expanding steadily and that stocks are likely to recover in coming months, as they have from past retreats during a six-year-long stock rally. Exports, the main growth engine of China’s economy, have declined throughout the year, and many housing markets have steeply dropped in terms of price and sales volume. “As China faces an extended period of strong headwinds, led by the need to rebalance its economy away from an unsustainably high rate of investment, investors should not expect a bounce-back anytime soon,” Scoffin said. But two factors are giving some analysts and traders pause and likely leading to further market swings: Wall Street analysts expect quarterly corporate earnings will decline for the second quarter in a row for the first time since the financial crisis, and financing conditions are tightening in corporate-bond markets. Global crude oil prices were down four of the last five quarters as U.S. crude shed 8.35% during the last three months, while Brent, the international benchmark dropped 10% during the period.

The weakness has raised concerns that China, the world’s second-largest economy, could trigger another global recession, a concern that Citigroup in September predicted had a 55-per-cent chance of happening in the next couple of years. The Dow posted its longest third-straight quarterly decline, something the blue-chips index hasn’t done since a six-quarter losing stretch ending in 2009. Together, the factors are causing stock investors who previously snapped up shares at the first sign of a marketwide pullback to boost cash balances and wait for further declines. Part of Wednesday’s bounce is also likely due to portfolio managers and institutional investors doing their typical end-of-quarter window dressing: selling off losers and buying winners so that they can say they hold hot stocks in their portfolios. “While we’d ‘like’ to make the technical case equity markets are in the process of establishing the proverbial double bottom and that the sell-off in growth stocks, such as biotech, marks the end of the broader correction, there is simply insufficient technical evidence to make that conclusion, yet,” said Robert Sluymer, analyst at RBC Capital Markets Global stock markets could continue to be volatile over the next two months as many investors brace for two crucial U.S. Some said they are worried about valuations that remain high by historical standards, while others are waiting to see if turbulence in the bond market and many emerging markets will subside. “We’re more concerned today about global growth and market-participant confidence than we have been in some time,” said Connor Browne, a portfolio manager at Thornburg Investment Management, which oversees $60 billion in assets.

The Fed will meet in October and December to set its benchmark rate, with many analysts forecasting that Chair Janet Yellen could move to raise rates at the December meeting. If the current quarterly losing streak were to be snapped in the fourth quarter, the total three-quarter loss of 8.6% would be the smallest of all the other three-quarter losing streaks. Copper snapped a four-month losing streak in September, but is still lower for five-consecutive quarter – on the session, it jumped 4.08% to $2.35 a pound. Private payrolls rose by 200,000 in September, matching expectations, according to payroll processor Automatic Data Processing and forecasting firm Moody’s Analytics. Peter Kenny, an independent equity market strategist, said in a note that as investors come to terms with rounding out a market with the worst quarterly performance in nearly four years, there are some bright spots to focus on for the final three months of the year. “The impact of crude’s collapse should reach its climax with Q3 earnings season in as far as S&P 500 earnings are concerned.

Some analysts note, however, that those fears have driven up bearishness in the stock market, which could potentially be a bullish contrarian indicator. If that’s the case, the worst could be behind investors this year. “A striking feature of the recent correction in global equities has been the accompanying deterioration in sentiment toward the asset class,” analysts at Barclays said in their quarterly outlook this week. “Having had four times more bulls than bears prior to the correction, bulls are now in the minority. In early August, before the S&P 500 fell into correction territory—a loss of 10% or more from a recent peak—the S&P 500 traded at 18.2 times the past year of earnings.

U.S. employment gains, consumer confidence, home prices, and GDP all speak to an economy that has thus far weathered the global economic storm,” he said. Following the jobs report on Friday, traders said the next catalyst for stocks will be third-quarter earnings, which are set to begin in earnest in mid-October. Beaten-down mining and auto shares led the way in Europe, with Glencore rising more than 12 per cent a day after the company dismissed concerns that it was on the brink of insolvency.

As traders looked ahead to the all-important September jobs report due out on Friday, the economic calendar was set Wednesday with private-sector employment data from payroll processor ADP. Growth stocks—shares of companies that tend to reinvest earnings into expanding the business instead of paying dividends—are also faring better than the broader market, suggesting many investors still believe the economy will accelerate. Jim Swanson, chief investment strategist at MFS Investment Management, said he continues to favor stocks and junk-rated bonds for a fund that he manages, the $3.1 billion MFS Diversified Income Fund.

A stronger US economy but a weaker one in China means you really don’t know which way the Fed should be moving,” Guy Foster, head of research at wealth manager Brewin Dolphin, said. He said he tracks half a dozen economic and market indicators for signs of a downturn, and that “none of them are flashing red.” The CBOE Volatility Index, or VIX, on Aug. 24 jumped to its highest closing level since October 2011. The index has remained above its long-term average of 20 since late August, signaling continued demand for S&P 500 options that protect against stock swings. “The VIX staying up here tells us that investors are anticipating volatility,” said Chris Jacobson, derivative strategist at Susquehanna Financial Group. “The corporate-bond market is sending signals” that stock prices won’t likely rise until bond prices bounce back, said John Lonski, chief capital-markets economist at Moody’s Analytics. “It’s a pretty stern warning.” Prices have dropped more sharply in the market for junk bonds, those issued by lower-rated firms. Elsewhere, New York Fed President and FOMC Vice Chairman William Dudley spoke about market liquidity in remarks at the Securities Industry and Financial Markets Association’s (SIFMA) liquidity forum in New York. The service sector is better because the consumer has more fire power and because energy costs have plunged and the labor market is reasonably strong,” Bittles said.

At the center of the controversy this time is funding to Planned Parenthood, a women’s health group that found itself amid a fresh wave of controversy over the summer when videos showed it allegedly sold fetal tissue for profit. Despite the brinksmanship, a bill that does not de-fund the organization is largely expected to pass both chambers of Congress, and make its way to the president’s desk by the 11:59:59 p.m. deadline.

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