On Friday, markets slipped heavily lower as fresh hints of weakness in the European and domestic economy crippled investor sentiment. However, it was not just Friday’s downtrend that was a matter of concern. With each benchmark losing around 12% for the quarter, this has been the worst quarter since the financial crisis in 2008.
The Dow Jones Industrial Average (DJIA) plunged 240.6 points or 2.2% to finish the day at 10,913.38.The Standard & Poor 500 (S&P 500) dropped 2.5% to close at 1,131.42. The Nasdaq Composite Index sank 2.6% to settle at 2,415.40. The fear-gauge CBOE Volatility Index (VIX) jumped 10% to trade at 42.96, logging its highest close since mid-August. On the New York Stock Exchange, the American Stock Exchange and Nasdaq, consolidated volumes were 8.58 billion shares, considerably higher than this year's daily average of 7.96 billion. On the NYSE, for every stock that moved up, four stocks were on the losing side. While the blue-chip index managed to close in the green for the week, inching up 1.3%, the other two benchmarks, the S&P 500 and Nasdaq, were not so lucky, losing 0.4% and 2.7% respectively over the week.
Investors had come to terms with such daily declines and weeks ending with benchmarks in negative territory. However, what will really bog down investor sentiment this time is the fact that benchmarks had their worst quarter since the quarter ending December 31, 2008. The Dow, S&P 500 and Nasdaq plunged 12.1%, 14.3% and 12.9%, respectively, during this quarter. European debt crisis and US recessionary fears have threatened the global economy and have significantly dampened investor sentiment.
Things have not looked any better on the domestic front. The jobs market has remained weak and the central bank has even hinted at a looming economic downside. Only this month, the Federal Reserve announced its plan to boost the economy, which is being termed as ‘Operation twist’. The Federal Reserve matched up to market expectations by announcing a plan to swap the short-term debt in its portfolio with long-term Treasury bonds, mirroring similar measures in the 1960s. However, the Fed also stated: “Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets. This observation seemed to suggest that another recession was in the offing and it negatively impacted the markets for a considerable time.
In August, Standard & Poor’s downgraded US’ credit rating which dealt a huge blow to the markets. As a result, the blue-chip witnessed a swing of 400+ points for a few days following the downgrade. By downgraded the US credit rating by a notch to AA+, Standard & Poor’s brought a close a century long period during which the US had possessed an AAA rating. The credit rating agency’s move was based on concerns regarding the political gridlock over lifting the debt-ceiling. The S&P had also stated that policy making had become less stable, less effective and less predictable than what was previously believed.
As concerns gained strength on Friday, the materials and banking sectors felt most of the impact and moved considerably lower. Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX), Southern Copper Corp. (NYSE:SCCO), Cliffs Natural Resources Inc. (NYSE:CLF), Alpha Natural Resources, Inc. (NYSE:ANR) and Agrium Inc. (NYSE:AGU) plunged 2.8%, 3.4%, 5.6%, 5.5% and 5.2%, respectively.
Banking bellwethers like Bank of America Corporation (NYSE:BAC), JPMorgan Chase & Co. (NYSE:JPM), The Goldman Sachs Group, Inc. (NYSE:GS), Morgan Stanley (NYSE:MS) and Citigroup, Inc. (NYSE:C) dropped 3.6%, 4.1%, 5.3%, 10.5% and 4.8%, respectively.
Moving on to economic data, the Bureau of Economic Analysis reported: “Personal income decreased $7.3 billion, or 0.1 percent, and disposable personal income (DPI) decreased $5.0 billion, or less than 0.1 percent, in August. Personal consumption expenditures (PCE) increased $22.7 billion, or 0.2 percent. In July, personal income increased $17.1 billion, or 0.1 percent, DPI increased $14.4 billion, or 0.1 percent, and PCE increased $76.6 billion, or 0.7 percent, based on revised estimates. Separately, The Institute for Supply Management-Chicago reported that the Chicago purchasing Managers index had gained quite unexpectedly in September. The index was up to 60.4, as against the consensus projection of 57.7.