Weekly Markets Commentary – November 10, 2008
David Joy — Chief Market Strategist, RiverSource Investments
Few Positive Signs
Last week's economic reports left little doubt that conditions deteriorated sharply in October. Another 240,000 non-farm jobs were lost in the month, while September's decline was revised significantly lower. The unemployment rate jumped to 6.5 percent from 6.1 percent.
Both Institute of Supply Management indices — manufacturing and non-manufacturing — slumped, with the manufacturing index falling to its lowest reading since 1982. Automobile sales fell to their lowest level in 16 years.
Stocks succumbed to the bad news and to some post-election selling that took prices down 10 percent in just two days. For the week, the S&P 500 Index lost 3.9 percent. Nevertheless, the index is still off the October 27 low by 9.7 percent.
Overseas markets fared appreciably better. The MSCI EAFE Index turned in a fractional gain of 0.2 percent, while the MSCI EMF Index fell 1.0 percent.
The evidence regarding credit market conditions showed a mixed picture. Some areas improved while others showed deterioration or little change.
Among the positive developments was a further decline in the London Interbank offered rate. The three-month Libor declined to 2.29 percent from 3.03 percent at the end of the previous week. On October 10, it was 4.80 percent. In addition, the amount of commercial paper outstanding in response to the Federal Reserve's purchase program exploded.
On the other hand, the spread between the 10-year Treasury note and high-yield bonds widened slightly after falling during the previous two weeks. All of the increase came about as a result of the drop in yield on the 10-year, which fell 16 basis points to 3.80 percent. The yield on the two-year note also fell, declining 22 basis points to 1.33 percent, suggesting no improvement in economic sentiment.
In Europe, the Bank of England slashed its overnight rate by 1.5 percent to 3.0 percent, its lowest level since 1955, and the European Central Bank cut its rate by a half percent, to 3.25 percent.
The economic calendar is light this week, except for October retail sales figures on Friday, which are expected to show their weakest reading since at least 2001, during the last recession.
In the absence of scheduled data reports and with third-quarter earnings season winding down, investor focus is likely to increasingly turn to the political front.
On Saturday, President-elect Barack Obama emphasized his support for a new economic stimulus package — if not from a lame-duck session of Congress, then soon after his administration takes office in January. He also indicated his support for a package of financial assistance for the auto industry, while General Motors indicated it was in danger of running out of cash.
Also over the weekend, China announced a two-year economic stimulus package of its own, amounting to almost 20 percent of China's gross domestic product, as growth appears to be slowing more quickly than expected.
Looking ahead, Friday represents the deadline for U.S. companies to indicate their desire to participate in the Troubled Asset Relief Program (TARP) program, and on Saturday, a meeting of the G-20 countries will convene in Washington to discuss the financial crisis.
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Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.
The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.
Morgan Stanley Capital International EAFE Index (MSCI EAFE), an unmanaged index, is compiled from a composite of securities markets of Europe, Australasia and the Far East.
Morgan Stanley Capital International (MSCI EMF) market capitalization weighted index is composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. The MSCI EMF Index excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners.
The London Interbank offered rate (Libor) is a rate that the most creditworthy international banks dealing in Eurodollars charge each other for large loans.
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International investing involves increased risk and volatility due to potential political and economic instability, currency fluctuations, and differences in financial reporting and accounting standards and oversight. Risks are particularly significant in emerging markets due to the dramatic pace of economic, social, and political change.
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