Go back a mere 18 trading sessions and the market was at all-time highs. The Dow hit an intraday high of 17,350 and a closing high of 17,279, on September 19th; that was 18 trading sessions in the past. For the Nasdaq composite we have seen a 10% correction from recent highs. That means this drop happened fast, and it also means the bear may have more room to run; this move is not mature in terms of duration or magnitude.
The major indices have dropped under the 200 day moving average; we were waiting for confirmation; we got it. The S&P looked to bounce off a different trendline. If you draw a straight line across the S&P lows beginning with the lows from 2011, which is where we saw support and a bounce today, at the 1820 level; it is also very close to the support levels from April at about 1815, which we talked about on Monday. That is an intermediate level of support, but it held today, and you have to respect the line, unless or until it breaks down.
Once we hit certain levels, people start to feel the pain and they move to safety; it is risk off, or a margin call is triggered, or you just get tired of the pain. And it was looking painful today; earlier in the session the Dow was down 460 points. The Russell 2000 index of small cap stocks reversed declines and finished the session in positive territory. For most of the trading day investors rushed for safe havens, including US Treasury debt. The yield on the 10-year Treasury note tumbled as low as 1.87%, its lowest since May 2013. Low interest rates are great news for people who want to borrow money or refinance their mortgage, but they typically show up when the economy is in the dumps and there’s not a lot of demand for loans. The low rates are lousy for savers. And even more ominous, low rates come with a whiff of deflationary stink.
And oil prices continued to slide, at one point down to almost $80 a barrel; great news when you go to fill up at the pump, but another indicator that demand is slow around the world. The lower oil prices are weighing heavy on the shares of oil drilling companies and the big oil companies. The worst-performing S&P Composite 1500 subsector this year has been Oil & Gas Drilling, down 22% through Tuesday, according to FactSet. The Oil & Gas Equipment and Services sector hasn’t fared much better, with a drop of 17%. You might think it would be a positive for the airlines, because fuel is a big expense, but no; airline stocks were down 4.9% intraday, because it turns out that one of the worst places for an Ebola patient is inside a sealed tube at 25,000 feet.
The second health care worker to be diagnosed with Ebola flew on a commercial flight one night before reporting a fever; and she had a fever while flying on the Frontier flight on Monday. Frontier says because of the short time between the flight and her fever, health officials were contacting all 132 passengers from the flight. Public-health professionals will interview the passengers and monitor those deemed to be at risk for contracting the virus. But what we are learning is that the public health professionals are flying by the seat of their pants, making up protocols as they go, and making mistakes which have the potential to grow exponentially.
Nurses at the Dallas hospital now claim that they did not have the proper haz-mat suits, they did not have the proper training; people facing possible exposure are not quarantined. The original Ebola patient, the late Mr. Duncan, was brought to Texas Health Presbyterian by ambulance with Ebola-like symptoms, then he was “left for several hours, not in isolation, in an area” where up to seven other patients were. “Subsequently, a nurse supervisor arrived and demanded that he be moved to an isolation unit, yet faced stiff resistance from other hospital authorities.” Lab samples were not properly sealed and then they were sent through the usual hospital tube system, which means the entire hospital could potentially be contaminated. The nurses also alleged that hazardous waste was allowed to pile up to the ceiling. This is third world stuff, and it is happening in Dallas.
The market fallout started today in the European markets. The yield on German 10-year bunds fell to 0.75%; the German DAX fell 2.9%. Germany is finally falling victim to its own compulsion for austerity, and it is slipping into recession and dragging down its neighbors. In the UK, the FTSE lost 2.8%; the CAC in Paris lost 3.6%; stocks in Italy lost 4.4%. The Greek stock market dropped 9%.
The Greek market is admittedly small, but it makes people think about the potential unraveling of the Euro Union. The Greeks are fed up with austerity and not so keen on the restrictions imposed as part of a bailout plan; they would just as soon skip the bailout, with a middle finger salute to the EU, and try to sort things out on their own.
And then we had some soft economic reports. Retail sales came in worse than expected, with headline sales falling 0.3% against expectations for a more modest 0.1% decline. Autos and gas down, home furnishings, building materials, nonstore retailers, clothing and accessories, and sporting goods and hobbies all down. Electronics up thanks to the iPhones, but that’s like a blue moon, rare.
The latest report on producer prices paid showed that prices unexpectedly fell 0.1% in September against expectations for a 0.1% increase. Additionally, the New York Fed’s latest Empire manufacturing report showed that business conditions plunged more than 20 points to 6.17 from last month’s 27.54 reading, and way below expectations. Then the Fed released its Beige Book, a survey of economic conditions; the general flavor of the report was that the economy was continuing to grow at the same “modest to moderate pace” seen since 2011, with moderate consumer spending and modest wage growth.
There wasn’t anything in the economic reports to suggest a 450 point slide in the Dow, but the data didn’t show any strength, and that is part of the problem. The US economy has been trying to dig out of the slow grind of modest growth. The thinking was that the economy might achieve escape velocity, might pick up enough momentum to increase demand, which would increase GDP, which would create jobs, and there would be a virtuous cycle. Yea, not so much.
And as the markets were slipping into darkness today, came word that Federal Reserve Chairwoman Janet Yellen was optimistic about the economy; a news leak that Yellen met with a group of economic big wigs on the edge of the IMF and World Bank meetings over the past weekend, and Yellen was quite upbeat, calling for 3% GDP growth in the US and seemingly confident the US would hit the inflation target off 2%. Yellen’s reported remarks were roughly in line with the forecasts presented by Fed policy makers at their last meeting in September. They saw the economy growing by 2.6 to 3 percent next year and inflation rising to 1.7 to 2 percent in 2016, according to their central tendency forecasts. So, nothing really new, but somebody felt it was important to have the Fed chief sounding confident on a day when the market was looking very ugly.
Not that the Fed can do much else. Back in 2007, when the market swooned, Bernanke was looking at the Fed Funds rate at 5.25%, and the Fed’s balance sheet was still under $1 trillion. Now rates are near zero and the Fed has added about $4 trillion to its balance sheet, and they don’t have many tools left in their tool belt. The Fed can’t cut interest rates from here. QE3 is scheduled to finish this month, and QE4 doesn’t seem likely any time soon. And so now, when the market dips, there is little to motivate an investor to buy the dips. The Fed might want to prop up the markets, but they don’t look like they have the tools for the job.
The robust parts of the economy have been getting a free ride on the back of QE in various forms: energy development, financial services, venture capital pushing the tech sector in Silicon Valley, but if you get out of those bubbles, the rest of the country is still slogging along, far from escape velocity, just trying to dig out of the ditch.
Oh yeah, it’s earnings reporting season. This morning Bank of America reported something to do with the third quarter. Net income was $168 million, down from $2.5 billion a year earlier. Adjusted earnings per share, which exclude an accounting gain, were 40 cents, beating the 32-cent average estimate. And that’s before $238 million of dividends to its preferred stockholders, so after those dividends it lost $70 million, a negative number. And that’s just the beginning of the mish mash of numbers that passes for an earnings report. I could spend the next week looking at the report and still not tell you with certainty that Bank of America turned a profit or a loss.
Netflix reported its third-quarter earnings results after the close of trading and the immediate reaction was swift and negative. It really had nothing to do with the earnings. The company reported weaker-than-expected growth in new video-streaming subscribers. The company said it added 3.02 million such subscribers during the quarter, but had forecast additions of 3.69 million video-streaming subscribers. HBO announced it will launch its own streaming service next year, a direct attack on Netflix. Netflix shares fell almost 26% in after-hours trading.
Ebay said it had net income of $673 million, or 54 cents a share, in the quarter, compared to $837 million, or 53 cents a share, in the year-earlier period.
American Express’ third-quarter earnings rose 8%, on net income of $1.4 billion, or $1.40 a share, in the quarter, up from $1.3 million, or $1.25 cents a share; revenue growth was below its target but trends in operating expenses were favorable. American Express was down 2.2% in regular trading and down a bit more after hours.