Markets suffered yet another fall yesterday, following the International Monetary Fund’s downgrade of global growth estimates to their lowest level since 2009. Investors also anxiously waited for the third-quarter earnings season to begin with Alcoa slated to report its results after the closing bell. The IMF’s move came just a day after the World Bank had reduced growth estimates for East Asia and the Pacific region. A sell-off in the technology and service sectors further intensified yesterday’s losses.
The Dow Jones Industrial Average (DJI) lost 0.8% to close the day at 13,473.45. The Standard & Poor 500 (S&P 500) slipped 1.0% to finish yesterday’s trading session at 1,441.48. The tech-laden Nasdaq Composite Index slipped 1.5% to end at 3,065.02. The fear-gauge CBOE Volatility Index (VIX) was up 8.3% to settle at 16.37. Consolidated volumes on the New York Stock Exchange, American Stock Exchange and Nasdaq were roughly 5.8 billion shares, significantly lower than this year’s daily average of 6.53 billion shares. Declining stocks outpaced the advancers on the NYSE; as for 75% stocks that dropped, 22% stocks moved higher.
The Street had a bearish sentiment from the very beginning of the trading day after the International Monetary Fund (IMF) reduced its forecast for global economic growth. Apprehensions regarding policies in the U.S. and Europe had compelled the organization to reduce global growth estimates. The IMF reduced global growth estimates for 2012 and 2013 to 3.3% and 3.6% from earlier projections of 3.5% and 3.9%, respectively. It also said China’s growth may reduce to 7.8% this year. To add to these concerns, the IMF believes that the risk for a global economic downturn is “alarmingly high”. The IMF noted that the U.S. has a 15% chance of slipping into a recession in 2013, whereas Japan and the European region’s odds are 25% and 80%, respectively.
This obviously unnerved investors since the announcement came just a day after the World Bank reduced growth estimates for East Asia and the Pacific region. The World Bank now forecasts a growth rate of 7.2% for China and Asia-Pacific countries, down from the 7.6% projected in May this year. Moreover, the World Bank noted that the slowdown in China would be far worse from what is being anticipated.
Meanwhile, third-quarter corporate earnings was on the verge of kicking off with Alcoa Inc. (NYSE:AA) reporting results after the closing bell. Benchmarks have enjoyed a decent rally this year. The future course of the markets depends a lot on how the earnings season will shape up. However, not many analysts are upbeat about corporate results this time around. Bellwether stocks such as FedEx Corporation (NYSE:FDX), Caterpillar Inc. (NYSE:CAT) and Hewlett-Packard Company (NYSE:HPQ) have issued warning about upcoming earnings, indicating weak demand in Europe and China.
Separately, small business sentiment suffered a fourth contraction in five months. According to the National Federation of Independent Business (NIFB), the business sentiment index, rather the optimism index, reduced by 0.1 point to 92.8. The chief economist of NIFB, William Dunkelberg, said: “Owners are in maintenance mode — spending only where necessary and not hiring, expanding or ordering more inventories until the future becomes more certain”.
Coming to the sectors, technology had a bad run yesterday with most of the stocks ending in the red. The fall in the technology sector also pulled the tech-laden Nasdaq index lower. Stocks such as Intel Corporation (NASDAQ:INTC), NVIDIA Corporation (NASDAQ:NVDA), Texas Instruments Incorporated (NASDAQ:TXN), Hewlett-Packard Company (NYSE:HPQ) and Atmel Corporation (NASDAQ:ATML) lost 2.7%, 2.1%, 2.4%, 0.6% and 1.6% respectively.
The Consumer Discretionary SPDR (XLY) was a heavy loser yesterday. Comcast Corporation (NASDAQ:CMCSA) lost 2.5% and other stocks such as Time Warner Cable Inc (NYSE:TWC), News Corp (NASDAQ:NWSA), CBS Corporation (NYSE:CBS) and The Walt Disney Company (NYSE:DIS) lost 1.1%, 2.0%, 3.7% and 1.6% respectively.