Quote of the month. “Adversity is the first path to truth.”– Lord Byron
The month in brief. At the start of October, investors hoped they would see some calm. Instead, they saw some history. On Wall Street, it was a month of agonizing losses … and astonishing rallies. In Washington D.C., historic move after move was made to try to fix the financial markets. The $700+ billion bailout package rolled out, and the Treasury Department decided to use some of the money to buy stakes in private banks. The Federal Reserve (and 13 other central banks around the world) cut interest rates … and then at month’s end, the Fed cut rates again. Oil futures (and many other commodities futures) fell dramatically. There were a few flickers of hope in the housing sector, and Libor rates began to descend. Consumer spending declined. Investors held on and hoped for change, whether it would come next week, next month or next year.
Domestic economic health.During October, many Americans (and journalists) equated the stock market with the economy and vice versa. The broad stock market (i.e., the S&P 500) fell almost 17%, and sometimes it seemed like that was the only story.1 But there was more going on. The massive “Wall Street” bailout (which actually contained $149 billion in tax breaks for the consumer) was at last passed 263-171 in the House of Representatives and signed into law October 3.2 On the same day, we learned that the jobless rate had stayed flat in September at 6.1% (but payrolls shrank by 159,000, the biggest cut in 5 years).3 The Institute for Supply Management’s service sector index read 50.2, showing marginal growth.4
On October 6, the Treasury Department named former Goldman Sachs VP Neel Kashkari as Interim Assistant Secretary of the Treasury for Financial Stability – that is, the new chief of one of the world's largest investment funds, who would oversee the purchase of “troubled assets” from various financial firms.5 In the same week, the Federal Reserve announced it would pay interest on bank reserves and buy short-term debt – and the latter move seemed to revive the commercial paper market.6,7
The Fed cut the benchmark interest rate by a full point in October – two cuts in three weeks, sending the federal funds rate to 1.0.8 The Treasury Department made a slight change in plan and put $125 billion into 9 major banks, with another $125 billion available to other banks. In return for the cash injection, the U.S. government got ownership stakes – shares paying a 5% dividend to taxpayers for the next 5 years.9
As the month wore on, more recessionary indicators appeared. We found out that retail sales dropped 1.2% in September.10 At least consumer prices were flat for the month, though core CPI did climb 0.1.11 The Reuters/University of Michigan survey of consumer confidence, however, fell all the way from 70.3 to 57.5 in a month.12 Halloween brought news that consumer spending had dropped 0.3% in September, the biggest month-over-month decline since June 2004.13 And in the clearest recessionary signal of all, we learned that America’s third quarter GDP was -0.3% (although analysts had expected a -0.5% figure).14
Global economic health. An impending global recession? More and more economists made that assumption in October. In fact, as November started, we learned that Eurozone manufacturing contracted at a record pace in October, and executive and consumer confidence has hit a 15-year low. As November opened, a European Commission report openly stated that a recession had begun and predicted 0.1% GDP for the Eurozone – not for the next quarter, but for all of 2009. Some economists thought even that prediction was overly optimistic.15
We saw the first coordinated interest rate cut in history during the second week of October, as 13 central banks worldwide reduced key rates.16 But there was no coordinated government attack on the credit crisis in the Eurozone, although the European Central Bank began offering unlimited loans to ease the credit crunch. Importantly, the Libor rate (the key interbank short-term lending rate) fell from 5.09% on October 9 to 1.67% on October 16, and 3-month Libor rates fell .4% over the same period.17 The government of Iceland actually appealed to the International Monetary Fund for help, receiving a $2.1 billion rescue package.18
Growth rates in Asian economies remained strong, even if markets were suffering: the economies of South Korea, Malaysia, the Philippines, Taiwan and India were expanding at a 4-8% annual pace.18 In fact, the IMF projects 8.4% 2008 growth and 7.7% 2009 growth for China, India and Southeast Asia's five other largest economies, which do have huge cash reserves. (However, currencies in Asia lost ground dramatically during the month.)19 Inflation showed signs of easing across the region: in fact, inflation rates in South Korea, Indonesia, and Thailand all declined in October.20
World financial markets. While U.S. stocks were hit hard, Asia’s stock markets were hit even harder. The Shanghai Composite Index dropped 24.6% in October, and India’s Sensex 30 lost 23.9%. The Nikkei 225 fell 23.8% on the month – and that was after a 12.1% gain in the last week of the month. Hong Kong’s Hang Seng Index dropped 22.5%. Most of the big European indices actually performed better than benchmark U.S. indices: the DAX lost 14.5%, the CAC 40 13.7%, and the FTSE 100 10.7%.21
Commodities markets. This sector was, quite frankly, pummeled in October. Oil futures fell 32.4%, and even gold futures fell more than 18%. Statistically, all commodities of consequence had a losing month. Palladium, which declined only 1.55%, was the “winner”. Silver and platinum lost 21% and 19%, respectively. The U.S. Dollar Index, which had climbed 2.7% for September, had its best month since March 1991 – it gained 7.9% in October, and it is up 11.8% for the year.22
Housing & interest rates. Some of the news was bad, but some of it was surprisingly positive. The saddest news item was a survey showing that about one in five U.S. homeowners had negative equity during the third quarter.23 But there was unexpected good news: pending homes sales were up 7.4% for August, a total repudiation of the 1.8% drop economists had forecast.24 September existing home sales were up 5.5% from August and 1.4% from a year earlier – and not since November 2005 had there been a year-over-year increase.25 On the downside, housing starts hit their lowest level since 1991 in September.26
Mortgage rates rose again … and fell again, falling notably in the last week of the month to end October at approximately where they started. 30-year FRMs were at 6.09% in early October, and at 6.04% in late October. 15-year FRMs averaged 5.72% at month’s end, compared to 5.77% a month earlier. As for other monthly mortgage movements, 5-year ARMs were at 6.06% compared to 6.02%, and 1-year ARMs were at 5.23% compared to 5.16%.27
Major indexes.It was the S&P 500’s worst month since October 1987, the NASDAQ’s worst since February 2001, and the Dow’s worst since August 1998.1 Let’s hope we don’t see any more months like this last one.
|
% Change
|
1-Month
|
Y-T-D
|
|
DJIA
|
-14.06
|
-29.70
|
|
NASDAQ
|
-17.73
|
-35.11
|
|
S&P 500
|
-16.94
|
-34.03
|
Source: CNBC.com, 10/31/08 1
Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends.
November outlook.As Bank of England governor Mervyn King recently put it, “the long march to boredom and stability starts tonight.” The great global effort to repair the credit markets is now firmly under way; Libor rates have eased, and perhaps other positive effects will be seen before the end of the year. Has the stock market bottomed out, or did the end of October represent a relief rally? Historically, November has often a positive month for the broad stock market – and when the market has descended in recent days, it has done so largely in response to fundamental indicators rather than panic and contagion. There is concern about hedge funds; there is concern about further deleveraging. Yet the Treasury, the Fed, and central banks across the planet have taken some extraordinary steps to restore confidence in the banking system and revive rationality in the financial markets. So in the end, a long-term investment approach might be the most rational decision of all, as the global march toward boredom and stability moves assuredly forward.
Here are the key economic releases for the rest of November: September factory orders (11/4), the October ISM services index (11/5), October unemployment and wages, September pending home sales and September wholesale inventories (11/7), September business inventories, October retail sales and preliminary November consumer sentiment (11/14), , October industrial production (11/17), October PPI and core PPI (11/18), October housing starts, CPI and core CPI (11/19), October existing home sales (11/24), the Conference Board’s November survey of consumer confidence (11/25), and October durable goods orders, consumer spending and new home sales (11/28).
