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Turbulent Week for the Markets

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Global economic slowdown” is in the newspaper headlines these days contributing to a panicky selloff in risk assets midweek and a rally in high quality bonds. Add in various well known simmering hot spots across the globe and Ebola worries and a fully valued market was bound to slip.

It was one of the most turbulent weeks in the markets in quite a while. Both bonds and stocks had wild intraday moves on Wednesday with the DJIA off over 400 points at one time (it closed down 173 that day). Ten year Treasury yields fell almost 40 bps during the day hitting 1.83% before closing at 2.11%.

By the end of the week, US equities were clawing back some of their recent losses as 3Q earnings season took hold. Citi and Morgan Stanley earnings beats drove financials higher even if JP Morgan and Wells Fargo were nothing to write home about.

APCM portfolio manager Brandy Niclai notes that with almost one-quarter of the S&P 500 market cap having announced Q3 earnings, 56 of 81 companies have beaten consensus estimates. By the close of the earnings season, analysts expect Q3 earnings to be up 8% vs a year ago. Next week, 130 companies are scheduled to report including the majority of the telecom services and industrials sectors, along with 42% of the tech sector and 34% of the consumer staples sector.

For the week the S&P 500 was down 0.6% closing at 1887. European stocks that had been hit hard over the first two weeks of October were flattish this week. Ten year Treasuries ended the week at 2.19%.

ISI commented on the economic anxiety noting: “While the US cannot be immune to weakening momentum in the Eurozone, Japan, China and other EM, the US is still largely a closed economy, and the effect of a stronger dollar and lower equity prices is significantly offset by lower gasoline prices and a very low 10 year yield and mortgage rates.” That seems right to us.

In fact, US economic data out this past week was generally positive except for a -0.3% decline in retail sales. But, industrial production rose nicely, jobless claims fell to a 14 year low and consumer confidence rose to its highest level in more than seven years.

The Treasury reported that the federal budget deficit for fiscal year 2014 was 2.8% of GDP ($483 billion), slightly lower than expectations. This represents the lowest deficit relative to the economy since 2007.

WSJ reports: Traders are becoming increasingly convinced that the world will remain awash in oil. The global benchmark, Brent oil, dropped to a four-year low closing at $86 on Friday and the U.S. benchmark (WTI) dropped to $83 – it was close to $105 this summer. Instead of cutting back on output, to help reduce supplies and increase prices, oil producers—from U.S. corporations to oil-rich nations—are keeping the spigots open. And there is little sign that global demand will rise quickly enough to help erase the glut.

Gasoline may be below $3 in a few more weeks (nationally, not Alaska, of course!) and mortgage rates below 4%. Both help put more money in consumers’ pockets just in time for the holiday season.

Next week’s economic calendar is thin. New and existing home sales will probably come in little changed in September. The Leading Economic Indicators should post a solid gain and suggest decent overall economic growth in the US going forward.

Halloween is just around the corner. Barron’s reports that the average price of a pumpkin is $3.94 (but here in Anchorage we pay about $11). That is down 17% from a year ago.

While many are off celebrating Alaska Day today we are hard at work here at APCM! For you Outsiders, Alaska Day commemorates the formal transfer of Alaska from Russia to the United States on October 18, 1867.

Jeff Pantages
Chief Investment Officer

 

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