Equity markets: New season, same concerns. Your summer vacation is over. Here’s what to expect for the markets in the all-important fall months.
This week, the climate is very different on Wall Street, and it is not only due to the change of season.
Stocks traded wildly all summer, rising or falling depending on the swings in the oil market and news in the financial sector. As usual, with many investors and traders on vacation, trading volume was light. The major indices are trading more or less at their early summer level at the end of last June.
However, after US Labor Day (September 1), investors are getting serious again and the financial slump in which the markets were in the summer is officially over. Traders rebound in the market, portofolio managers place their bets for the rest of the year. “Investor and trader interest is growing,” says Brian Gendreau, investment strategist at ING Investment Management. On Wall Street, “the pulse is quickening and people are starting to re-examine their investment assumptions.”
Several professional investors were asked about the trends that the stock markets could have this fall. Here are five indicators equity investors should be watching in the coming weeks.
1. OIL PRICES
While the price of oil had reached a record high at the start of the summer, equities suffered bravely. High energy prices are hurting consumer spending and reducing corporate profit margins. Since last July, oil prices have fallen, and equities have done a little better. Oil is currently trading nearly 22% cheaper than its all-time high of $147.27 reached on July 11.
“The upward trend [in crude oil] seems to have reversed since then. says John Wilson, chief technical strategist at Morgan Keegan. The threat of hurricanes and tropical storms could push oil prices higher, but Wilson believes any price spike will be temporary.
Hurricane season, however, officially lasts until the end of November. Equity investors are well aware that a major storm could disrupt oil supplies and send oil and gas pump prices skyrocketing once again. “We’re holding our breath,” admits Richard Sparks of Schaeffer’s Investment Research.
2. CREDIT MARKETS
“The periods of January and September are the most decisive of the year for the credit markets. says Brian Reynolds, head of market strategy at WJB Capital Group. Just after the respective holidays of December and August, these two months are times when a large number of new corporate bonds are issued.
Disrupted by the financial crisis, corporate bond issues were a “disaster” last January, Reynolds says, noting that it was a preview of early 2008 tough months for the stock market.
Eight months later, will investors in the credit markets be ready to buy new bonds? “We might have a rebound in stock prices [this fall], but if people buy corporate bonds any jump will be just that – a temporary rebound. adds Reynolds.
Credit market professionals have been even more pessimistic than investors this summer. Now that summer is over, investors might decide bonds are at reasonable levels, or they might decide the environment is still too risky to be a big bond buyer.
3. THE FINANCIAL AND REAL ESTATE SECTOR
Much-disturbed mortgage financial products Fannie Mae and Freddie Mac have been in the headlines all summer, and investors continue to worry about the threat of more bank failures . Expect this focus on the financial sector to continue this fall.
Financial problems are clearly weighing on the stock market. “It is hardly conceivable that stock prices will experience a sustained rise without driving down the shares of other financial stocks. “, explains Gendreau from ING. “However, it is hardly conceivable that financial stocks will go up without a sign that the housing market is stabilizing. House prices have a direct impact on the value of backed bonds, which have caused huge financial losses for businesses this year. “, he adds.
On August 26, the 20-City Composite indicator of the S&P/Case-Shiller, price index for the 20 main areas, showed a 15.9% drop compared to the previous year. Nonetheless, the pace of the decline has slowed compared to the previous month. “We’re starting to get a mixed picture, which makes me think the housing market could be bottoming out. says Gendreau.
Upcoming housing data will confirm or refute whether the market pain begins to fade.
4. THE ECONOMIC OUTLOOK
Wall Street professionals like to say that the stock market looks to the future, trying to anticipate corporate earnings and economic conditions in the next six months.
The end of summer gives investors a good excuse to get their crystal balls out and try to predict what the next year holds. In September, “you start more and more focused on the next calendar year. », explains Georges Yared from Yared Investment Research. He believes that the stock market rally could come with the expectation of big corporate profits next year.
A very important factor for the environment in the coming year will be the report on the job market in August, scheduled for September 5th. Economists expect the unemployment rate to remain stable at 5.7%, after rising in recent months.
“If the unemployment rate continues to rise rapidly, the tough labor market could have a big impact on consumer spending in the United States. says Peter Cardillo, head of market economics at Avalon Partners. If the labor market does not worsen, equity markets could interpret the report as a sign that the economy is ready for a recovery in early 2009. This is the best case scenario. “The economy limps along its way until we get a recovery. adds Cardillo.
5. VOLATILITY
Although stock market volatility has been high since the onset of the credit crisis in mid-2007, the summer of 2008 was particularly brutal. The major indexes have fluctuated wildly up or down at the slightest bit of news, with big ups barely a day after big downs, and vice versa.
There’s no reason to think this volatility will end just because summer is over, market watchers say. Sparks of Schaeffer’s notes “a lot of apprehension about what the next market trends will be, bad news after bad news…”. Among the subjects worrying the markets on a daily basis, we find the price of oil, credit conditions, and even the American election.
For Yared, hedge funds increase volatility. Many hedge funds haven’t had a good year, “they go performance hunting”, jumping on every new rumor to speculate on whether stocks will go up or down, he says.
Some investors are watching the 2008 election closely, betting the results will have a big impact on sectors like health care, energy, and defense. Other investors, including James King, chairman and chief investment officer of National Penn Investors Trust Co., argue the election will have little long-term impact. But King acknowledges that the election is having an effect on overall market sentiment. This sentiment “contributes to the volatility we see in the market,” he says.
For investors, the challenge is to look at changes in stock market volatility, day-to-day, and even month-to-month, and decide on much longer-term stock price trends.
