Sunday, August 21, 2011

US markets fall for 4th week on double dip concerns

US markets fell this week on concerns about a double-dip recession in the US and the euro zone. On Friday, investors were concerned about banks in Europe, when the Swiss Central Bank revealed that it has borrowed $200 million from the US Fed to lend to a Swiss bank. On Friday, the S&P 500 fell 17.12 points or 1.5% to 1,123.53. The Dow dropped 172.93 points or 1.57% to 10,817.65. 
For the week, the S&P 500 tumbled 4.7%, while the Dow lost 4%. The S&P 500 is down 17.6% from its April high, and down 10.7% for the year.

Horrible economic data shocks markets

Markets had appeared to be stabilizing early in the week. However, on Thursday, Philadelphia's manufacturing index was reported at a stunning -30.7 for August. It was much lower than the 2 that economists expected, and a big drop from the 3.2 in July. The reading caused panic among investors, sending the Dow down over 400 points.

Also on Thursday, initial jobless claims was worse than expected. Claims increased by 9,000 last week to 408,000. In addition, existing home sales fell by 3.5% in July over the month before.

German and French leaders meet

On Wednesday, the German chancellor and the French president discussed an economic council, a constitutionally-guaranteed deficit control and a financial tax. However, markets were not encouraged by a lack of concrete action.

Euro zone close to recession

On Tuesday, the euro zone reported 2nd quarter GDP growth at only 0.2%. In addition, Germany's GDP grew only 0.1% over the previous quarter. It caused investors to become concerned that the euro zone was very close to a recession.

Japan provides better-than-expected GDP reading

On Monday, Japan provided a boost to markets when 2nd quarter GDP was reported at -1.3%, better than the -2.5% expected. However, it was the 3rd consecutive quarter of negative GDP growth.

Looking ahead to next week

I am currently relatively bullish. I expect Ben Bernanke to announce measures supportive of the stock market on Friday, after his meeting in Jackson Hole. I expect events to be similar to the same time last year, when stock markets rallied after Bernanke hinted about QE2 in late August (it was officially announced on Nov. 3).

I expect the size of the Fed's proposal to be smaller than QE2. It is expected to include buying of longer term Treasuries and selling of shorter term Treasuries, and a decrease in the interest that the Fed gives to banks for depositing cash at the Fed. Additional measures are possible, including decreasing the 0%-0.25% interest rate. I expect Ben Bernanke, a well known dove, to act aggressively to boost the economy and decrease unemployment. 

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