W is for whiplash: There's volatility, and then there's volatility. Two of the Dow's 11 worst days ever (in points) occurred last week; however, they alternated with two of the Dow's 11 best days.* Intraday flip-flops of 500 points on the Dow became daily occurrences, alternately encouraging investors and grating on their already frayed nerves. The S&P 500 is now down 13.5% from its year-to-date high on April 29, and with a 19.4% drop since that date, the small-cap Russell 2000 is a whisker away from the 20% bear-market threshold. However, despite domestic equities' W-shaped wild ride, last week was still a better one than either of the previous two. And even Monday's 635-point, 5.5% plunge in the Dow didn't come remotely close to the 22.6% drop seen on October 19, 1987.
Soaring demand for gold, which sent prices briefly above $1,800 an ounce only days after it topped $1,700, also led the U.S. Mint to briefly halt online sales of gold coins to collectors. Oil's decline to roughly $80 a barrel on fears about the potential for a second global recession promised consumers a shard of good news: the prospect of lower gas prices.
Last Week's Headlines
- Concern about weaker-than-expected economic data led the Federal Reserve's Open Markets Committee to announce that it plans to keep interest rates at their current extreme lows through at least mid-2013 to try to give a gasping recovery some breathing room. It was the first time the Fed had put a time frame on the "extended period" of low rates that it has been promising. However, there was no sign of a new round of bond-buying.
- In one of the market's more ironic twists, post-downgrade anxiety about the turmoil in equities and overseas debt resulted in high demand at two of last week's Treasury auctions. That demand in turn resulted in record low yields for 3-year Treasury notes (0.5%) and 10-year notes (2.14%). However, investors weren't quite as sanguine about longer-term bonds; the yield at an auction of 30-year Treasuries bounced up 25 basis points to 3.75%.
- France became the latest European country to spook global investors. Fears about the level of Italian debt held by French banks led to concerns about possible downgrades there, and the cost of insuring French sovereign debt in the form of credit default swaps rose.
- Meanwhile, to try to meet the European Central Bank's demand that Italy's budget be balanced by 2013, Prime Minister Silvio Berlusconi announced a much-awaited €45.5 billion package of spending cuts and tax hikes.
- In the wake of the U.S. debt downgrade, Standard & Poor's also downgraded to AA+ the debt of Fannie Mae, Freddie Mac, and 10 of the country's 12 Federal Home Loan Banks. All help make credit available for mortgages and community lending, and are supported by the U.S. government. S&P also is reviewing the downgrade's potential impact on local and state governments that get federal funds, and some insurers; however, the U.S. downgrade would not automatically mean the same for munis.
- U.S. consumer sentiment during the first week of August was lower than it was during the recession and the 2008 financial crisis. The 54.9 reading on the Thomson Reuters/University of Michigan's most recent survey is not only a sharp drop from July's 63.7, but is the lowest since 1980.
- The market turmoil briefly put Apple ahead of ExxonMobil as the U.S. company with the biggest market cap.
- Interest rates on 15-year fixed, 5-year adjustable, and 1-year adjustable rate mortgages hit all-time lows, according to Freddie Mac, and 30-year fixed-rate mortgages were at a 2011 low of 4.32%.
- Retail sales hit their best level in four months, increasing by 0.5% from June. The Commerce Department said it was the second consecutive monthly increase.
- After announcing last month that it plans to close as many as 3,700 post offices, the U.S. Postal Service warned Congress it would face the equivalent of bankruptcy unless it can cut employee benefits and 120,000 jobs by 2015. The job cuts would be in addition to the 100,000 jobs to be eliminated through attrition.
- An appellate court ruled that individuals cannot be compelled to buy health insurance as part of President Obama's health-care legislation. The decision contradicted another appellate court's ruling upholding the requirement and likely set the stage for the Supreme Court to rule on the issue.
Investors will be watching to see if the upward movement at the end of last week signals the beginning of an end to the recent downdrafts, or whether the beatings will continue until morale improves. The ailing housing market also will be in focus, and options expiration at the end of the week could mean increased volatility (though it's hard to see how it could beat last week).
Key dates and data releases: international capital flows (8/15); housing starts, industrial production (8/16); wholesale inflation (8/17); consumer inflation, home resales (8/18); options expiration (8/19).
*Based on data from the Stock Trader's Almanac 2011 . Data source: Includes data provided by Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. Equities data reflect price change, not total return.
The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.
