Brace yourselves for the worst September since 2008

North American markets ended the week on Friday on a positive note, as Fed chairman Ben Bernanke promised more aggressive quantitative easing measures if necessary. However, for the week, the S&P 500 fell 0.7%, its third consecutive weekly fall. It was also its longest consecutive fall since February, and left the S&P 500 13% below its April highs. Meanwhile, the Dow fell 0.6% for the week, leaving the index down 3% so far this month.

On Friday, U.S. second quarter GDP was revised down to 1.6% from the prior reading of 2.4%. It was also much lower than the first quarter growth of 3.7%. However, since most economists had been expecting a worse revision to 1.4%, the markets rallied on the news.

Various data earlier in the week were far gloomier. U.S. July existing home sales fell to their lowest level in 15 years, while new-home sales were the lowest on record since 1963. Housing sales were weak despite the average rate for a 30-year fixed-rate mortgage falling to 4.42 per cent, the lowest in the history of a 39-year survey by Freddie Mac. In addition, U.S. July durable goods orders rose 0.3% from the prior month, which is far lower than the 2.8% that was expected. Removing the volatile transportation component actually leaves the number at -3.8%, the largest fall in 6 months.

News from Europe this week were not any better, as S&P cut its rating on Ireland to AA-. The rating agency stated that the Irish banking industry needs an injection of $50 billion from the government, which is far higher than the previously-estimated $35 billion, and equal to 32% of the country's GDP. As a result, Irish CDS rose to their highest level in 6 months, to 316 basis points, which indicates a 23.6% chance of a default within 5 years. 

While Friday offered a pleasant upward bounce, the direction for the coming week is clearly downwards, with some economists expecting unemployment to edge up to 9.6% from 9.5% with Friday's employment data. Another data to watch is the ISM's report on U.S. manufacturing in August. A weak reading would raise double-dip concerns among investors.

In fact, as we head into the traditionally treacherous month of September, I expect continuing worst-than-expected economic, employment and consumer confidence data to drive North American markets lower. In fact, I am expecting a fall of 7% to 11% for the Dow, S&P 500 and TSX in September.

12-month outlook for North American stock markets: gloom and doom ahead

The Fed statement on August 10^th was a wake-up call for many investors. Ben Bernanke acknowledged the weakness of the U.S. economic recovery, and promised to use quantitative easing measures to boost the economy. He pledged to use proceeds from mortgage-backed securities to purchase U.S. Treasuries, in order to keep the lending rate low.

Many investors were stunned that U.S. economic growth was fizzling with most of the stimulus having been spent. In addition, they realized that, this late in the economic recovery, the U.S. economy still needed quantitative easing. Some investors had been expecting more aggressive measures from the Fed, so the announcement left them disappointed.

The numbers spoke for themselves. The week of the Fed announcement, the S&P 500 fell 3.8%, while the Dow dropped 3.3%. In the next week, U.S. initial jobless claims rose to a 9-month high, while a mid-Atlantic manufacturing index showed a contraction for the first time in a year. The markets responded with the Dow falling 0.9% for the week, while the S&P 500 declined 0.7%.

The situation in the euro zone has not been any better. The worst of the Greece crisis is over, while worries about the Spanish financial industry collapsing has mostly faded. However, austerity measures will leave economic growth in the euro zone weaker than the historical average for years to come.

While Germany posted a 20-year-high quarterly economic growth of 2.2% last week, Greece posted a decline of 1.5% in the same quarter. The logical outlook for the euro zone in the next 12 months is relatively strong economic grow for Germany, accompanied by weak grow in the smaller periphery euro zone economies.

With the overwhelming majority of economic data from the U.S. in recent months being worst than expected, it is logical to conclude that data in the coming weeks and months will continue to disappoint.

As we head into the traditionally volatile month of September, I expect North American equities to continue falling in September and October on the back of weak consumer sentiment, economic and housing data from the U.S. In fact, I expect markets to retest the May to July 2009 levels.

I expect to see a 5% to 10% rally in November and December (combined), after a brutal September and October. The holiday season should provide the usual boost. However, November will also see the midterm elections in the U.S. All of the seats in the House of Representatives and 37 of the 100 seats in the Senate up for election. The results will be in the Republicans' favour, which will make the passing of any stimulus package extremely difficult.

Beginning in early January, I expect markets to start falling again on weak economic data. With a possibility that the U.S. would enter a double-dip recession in the summer, the markets will price in this concern about 6 months ahead. This means that markets will face the most weakness in January to March, as they retest the May 2009 levels.

From September to January, the U.S. Fed would have attempted more aggressive quantitative easing measures to boost economic activity. However, the fact that the key lending rate is already at 0% to 0.25% means the Fed's most effective tool is unavailable. The result is that a new stimulus package will be needed. However, with the Republicans having expanded control in the House and Senate, and fears among some Americans that the high national debt would lead to a Greece-style crisis, the passage of a new stimulus package will be extremely difficult.

I expect a long and drawn-out attempt in the House and Senate in trying to pass a new stimulus package in January to March, while stock markets slide on an imminent double-dip recession in the coming months, and the uncertainty of whether the stimulus will be passed. With that backdrop, I expect markets to fall to May 2009 levels.

Expect markets to head lower as investors face plethora of economic data

The S&P 500 and Dow declined for a second straight week on concerns about an economic recovery that is losing steam. For the week, the Dow fell 0.9%, while the S&P 500 declined 0.7%. The Nasdaq managed to finish the week in positive territory by adding 0.3%.

The worrisome Fed statement on August 10^th continued to pull markets lower this week. Adding to the concerns were Thursday's report of U.S. initial jobless claims, which shows a nine-month high; meanwhile, a mid-Atlantic manufacturing index showed the first contraction in a year.

Data from Credit Suisse have shown that institutional investors have taken a more defensive positions in the second quarter in the face of a weakening economic recovery. They increased positions in sectors such as telecoms and utilities.

M&A activity provided a boost to a select number of sectors, as BHP Billiton launched a $39 billion bid for Potash Corp., and Intel bought McAfee for $7.68 billion.

Things were not any more encouraging in the euro zone, as the euro fell to a 5-week low of US$1.266, after a ECB Governing Council member urged the ECB to extend its loose monetary policy. Meanwhile, the yield on the 10-Year U.S. Treasury fell to a 1-year low of 2.552%, as investors sought a low-risk asset.

For the coming week, I expect markets to continue heading lower, as the gloom from the August 10^th Fed statement continues to persist, and investors continue to realize the implications of the weak initial jobless claims and manufacturing activity data. Investors will be focused on plenty of economic data this week, with reports on U.S. existing-home sales and new home sales in July, durable goods orders in July and GDP for the second quarter. With the overwhelming majority of economic data from the U.S. being worst than expected in recent months, investors should expect most of the data this week to be the same.

Rough times ahead for markets as a very weak U.S. economy becomes reality

This week has been very tough for markets world-wide, as U.S. indices recorded their biggest weekly fall since early July. The S&P 500 fell 3.8% to end at 1,079, while the Dow dropped 3.3% to end at 10,303. Markets' weakness this week was caused by the U.S. Federal Reserve's statement on Tuesday. The Fed promised to use quantitative easing measures, in the form of buying U.S. Treasuries using proceeds it has received from its mortgage-backed securities. 

While the measure was aimed at helping the economy by keeping borrowing costs low, the fact that this far in the recovery, the U.S. still needs quantitative easing measures caused concern among investors. In addition, some investors had expected more aggressive measures from the Fed, so the announcement left them disappointed.

Meanwhile, in the euro zone, Germany posted quarterly GDP growth of 2.2%, which was a 20-year high, and stronger than the 1.4% that was expected. However, off-setting the good news was that Greece posted a GDP decline of 1.5%. Overall, the euro zone posted a GDP rise of 1%, higher than the 0.6% that was expected. U.S. GDP for the same quarter went up 0.7%, which is consistent with recent data showing economic activity in the euro zone being relatively stronger than the U.S.

However, bad news from the euro zone's financial sector caused Western Europe's sovereign CDS to rise 10.5% this week. For example, Spanish banks borrowed $140 billion euros from the ECB this week. In addition, the euro fell 4% versus the U.S. dollar this week, closing at $1.2754 U.S. 

Thus, I expect markets to head lower in the coming, until positive news from the U.S. (very unlikely), the euro zone or China emerges. In fact, with the earnings season coming to a close, the reality of economic weakness in the U.S. might pull markets lower for the next several weeks. This week, retailers including Wal-Mart and Target will be announcing their earnings. 

Waiting on the Fed

Stock markets ended higher this week, as the Dow posted a weekly gain of 1.8%, while the S&P 500 went up 1.5%. Interestingly, the volatility index VIX, which is a 30-day risk forecast of stock market volatility, fell 1.6% to end at 21.74. The VIX has fallen significantly since it reached 45 on May 20^th. In terms of technicals, the S&P 500 closed at 1,115 on Friday, which is above its 200-day moving average.

However, U.S. employment data released on Friday continued to disappoint. The private sector created 71,000 jobs, which is lower than the 90,000 that economists expected. Meanwhile, the unemployment rate remains at 9.5%. Recent U.S. GDP and employment data have showed that economic growth has slowed in recent months, while unemployment remains stubbornly high. Clearly, the effects of the stimulus package are waning.

Therefore, economists have increasingly called for the Federal Reserve to stimulate the economy. Ben Bernanke has said previously that he may use quantitative easing measures. With the Fed's policy-making committee is meeting this Tuesday, quantitative easing policies such as buying mortgages and other assets is a possibility. Even if the Fed does not announce quantitative easing on Tuesday, it is clear that they will have to do so in the near future.

As for the market outlook this week, the poor employment data released on Friday could continue to have a negative impact on markets. If the Fed were to announce quantitative easing policies on Tuesday, that would logically provide a positive boost for the markets. However, it would also mean that the Fed is acknowledging the economic weakness, which could hurt markets as weak GDP growth becomes more evident.