Stock markets were lower at the end of the week, reversing the strong stimulus fueled rallies seen previously, as investors took a step back and re-assessed the global economic situation in terms of its potential growth outlook. The result was a moderation of the optimism that was seen at the beginning of September, when the S&P 500 reached its highest trading levels since the all-time highs in 2007. Given that investors are beginning to overlook the previous confidence that resulted from central bank stimulus prospects, prices in equity markets are beginning to look vulnerable to substantial losses given that stock values have reached overbought territory.
The biggest losses for the week were seen in stocks that have heavy exposure to finance and commodities assets, with some key examples seen with Bank of America (BAC) and Alcoa (AA), which both saw declines of greater than 4.6 percent. But the losses were spread across sector groups and indexes, with the Dow Jones Industrials showing its largest weekly loss since the end of 2011. One of the few bright points was seen with Apple, Inc. (AAPL), which rose by 1.3 percent on the week but these gains are largely being attributed to its debut of the iPhone 5, which is expected to be one of the largest product introductions in the history of consumer electronics.
Recent Rallies Starting to Look Vulnerable
Overall, last week’s activity was moderately negative but looking forward, investors will be forced to assess the current values of market prices and determine whether or not these valuations are excessive. With the S&P closing at the 1460 level and the Dow Jones now seen at 13,580, the main question going forward will be whether or not this latest weekly performance is an indication of consolidation (before another run higher) or a stalling point after the posting of significant historical highs. Since most of the recent optimism has been based on stimulus promises (rather than actual strength in GDP growth or corporate earnings), the latter scenario is beginning to look more likely.
The earliest indication that we would see declines came with economic data releases which suggested that the global economic slowdown is still in place. The latest manufacturing survey out of China showed contraction for the 11th month in a row while export data out of Japan dropped and services and manufacturing output in the Eurozone showed that total activity has fallen to its lowest levels in nearly 40 months. In the US, jobless claims increased and the Leading Indicators report dropped from what was seen in the previous month.
Ahead next week, economic data will come with US Consumer Confidence, New Homes Sales, and second quarter GDP, and this will be taken along with French GDP and German IFO, CPI and monthly jobs figures as traders look to assess the strength of the individual economies in the Eurozone. Any weakness in these areas could lead to a second straight week of declines as investors with long positions might choose to exit and take profits at these elevated levels.
About Richard Cox
University Teacher in International Trade and Finance. Specialty in technical/fundamental analysis of the commodities and currencies markets.