You can run, but you cannot hide. Stock investors are once again showing that they have little appetite for uncertainty, as the major market benchmarks continue to endure wide swings – mainly to the negative. The latest being the rout this past week for equities around the world with unrelenting selling. While many corporations delivered respectable second-quarter results, they have been overshadowed by a stock market correction in China and concerns about an economic slowdown and the devaluation of their currency. Investors took a hard look at the developments within the Chinese economy and believe these obstacles will materially affect companies doing business there and trickle down to other parts of the world, as well. Hence valuations, which have been elevated, had to be adjusted. On top of the China dilemma, commodities continue to sink led by oil, which fell briefly below $40/bbl. and have yet to hit bottom. Indeed, it was a very unstable week on Wall Street with the Volatility Index (or VIX), also known as the “fear gauge” rising sharply during the five-day selloff.
The U.S. stock market has been unable to make any sustained progress as we move through the third quarter and is negative on the year by about 4%. For the week, the Dow Industrials lost 1,018 points – the biggest weekly point decline since October 2008 – and, along with the S&P 500, equal to a nearly 6% drop. Friday was particularly ugly with a loss of about 3% for the two major averages. The NASDAQ was lower by nearly 7% over the past five trading sessions. I am sure that margin calls were ringing off the hook thus forcing sales to cover losses, exacerbating the selloff. All sectors were in negative territory led by energy and technology, which were lower by 9% and 7.5%, respectively. There was a rush toward treasuries, with the yield on the 10-year note falling to 2.05%, and to some extent utility stocks and telecoms, but they too were negative on the week. And gold, a contrarian play, was higher by $47/oz. In my view this start of a correction, while painful, is healthy for the market in the long-run. I don’t see a long-term bear market ahead, but the next few weeks will not be pretty as we near the Federal Reserve’s interest rate hike decision next month. Such pullbacks may now be making the market look more attractive again – particularly as there continue to be few decent alternatives to equities. But as the saying goes, “don’t try to catch a falling knife”. Looking further out, the U.S. economy continues to perform nicely even as problems persist around the globe. Retail spending has picked up; industrial production posted its strongest showing in eight months; there are better utilization rates at U.S. factories; consumer sentiment is brightening; job creations are improving; and further resilience in housing, where starts recently climbed to their highest level since late 2007, are some economic bright spots to look toward the future. But buckle up. August has proven to be one of the worst months for the stock market, only better than September.
Here is the answer to last week’s trivia question: HSBC Holdings is one of the world’s largest financial institutions. From what do the letters “H S B C” originate? Home State Banc Corp.; Hongkong and Shanghai Banking Corp.; Hague Staat Bank Co.; or Halifax, St. John and British Columbia, Ltd.? Answer: Hongkong and Shanghai Bank Corp., which was established in 1865 when Hong Kong was a colony within the British Empire. It is the namesake and one of the leading subsidiaries of London-based HSBC Holdings, PLC. The parent company, with $2.67 trillion in assets, operations in 80 countries and 60 million customers, ranks as the world’s fourth largest bank ranked by assets. It operates in the U.S. as HSBC Bank, USA.
Today’s Trivia Question: George Steinbrenner purchased the New York Yankees in 1973 for $8.7 million from which company? News Corp.; Coca-Cola; CBS; or New York Life Insurance?