Stock Market Seesaw


U.S. shares took another small hit today. Yesterday, the Dow Jones index plummeted more than 400 points or 2 percent in early trading, but by the end of the day recovered to a loss of 173 points or 1 percent. Are jittery markets in Europe to blame or is the uncertainty a reaction to the Ebola threat? We take a look what's going on behind the market's wild ride.


Read an interview with Adolfo Laurenti , managing director and chief international economist at Mesirow Financial.

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Q: What does the volatility from yesterday reflect about how investors view the U.S. economy?

I think there are two issues at play right now. One is the uncertainty about the U.S. economic outlook with tapering of the Federal Reserve coming to an end and the concern about the momentum of the U.S. economy. Speeches by Federal Reserve presidents in St. Louis and Boston cracked the door open for revisiting exit strategy of QE3 [quantitative easing] along with comments by Charlie Evans from last week. We also had data from U.S. retail sales yesterday that was not good. You put uncertainty about monetary policy driven by disappointing numbers and that mix creates uncertainty and makes investors uncomfortable.

Q: And  what about the global economy?

There is bad news out of Europe where some countries are failing to get financial traction. The deflation risk is continuing to be real in the Eurozone at large. And there are some deep divisions on policy strategy to counter these weaknesses – the use of fiscal measures. The fact that some countries like France and Italy are pushing for expansive measures in contrast with others like Germany is not good. Greece is always very volatile, and it’s not a surprise but is a recurring problem that resurfaces. Nervousness contributes to the debacle of this week.

There are strategic issues with Ukraine and Russia which is a major problem for some countries like Germany. Then you have conflict in the Middle East with Syria and ISIS and instability in Iraq. All this bad news at once is not a recipe for a very confident market.

Q: What’s the big picture in the U.S. for the economy?

We know markets are volatile, so there is a chance of bounce back but over the last couple of years, investment has been solid. There has been good news. Job market has been fairly resilient to this volatility, and we have seen initial claims, which is an indicator strongly tied to job creation, and it is pointing to 200,000 plus added over the last month. October will be equally as good as September. The big picture for us remains a picture of encouragement, but we do not have strength and momentum. Overall, the pace of the economy has picked up. For us, our stance is we are nervous about volatility, but the bigger picture is not harsh. Globally, that is not the case. Europe has missed opportunities to do more in terms of financial restructuring. Fiscal discipline is about to be relaxed in the Eurozone. With relaxation of fiscal discipline, economies expect some support. I’m concerned the relaxing will create upward pressure on interest rates and create another bout of sovereign debt.

Q: Volatility can be good for Chicago – as was the case for CME yesterday?

Clearly too much volatility is a bad thing. In the short term, spiking volatility gets people excited because it spurs activity and transactions, which are welcomed by financial exchanges. But in the long-term higher volatility can mean increased risk of mistakes and it reduces transparency of prices, and long-term investors won’t know where prices will land - not driven by economic fundamentals but the mood of investors and traders. We are all aware that this is what makes volatile moods – essence of the market and volatility. Over the long term, when you have all this uncertainty politically and in the market, more and more people will step back and sit on the sidelines because they don’t want to be caught in an emotional wave that will clear after a few days. Short-term volatility is exciting but this big emotional wave is something that may become counterproductive especially in the case of those with retirement savings in 401(k)s and those who have been saving for retirement.

View the Dow Jones Industrial Average from the past 24 hours.

Q: Wall Street bounced back even though the U.S. recovery was been sluggish. Is this a sign that stocks are overvalued?

It’s hard to tell. I’m not a stock guy. Expectation has been solid going forward. I also recognize an honest uncertainty out there. You see bonds may have peaked given massive purchases by Fed that may come to an end. The sense is that the U.S. Federal Reserve is closer to being done with its tapering. We are expecting the bond market to pull back and that is a factor risk. For those just entering the market, would you buy asset likes bonds where people expect pull back or take a chance on stocks that have been strong and have been growing at a brisk pace in recent months? I am not too excited when monetary policy is the driver of market prices because it increases the chance for investors to make mistakes but at the same time, in this broader picture, people see risk in bonds and that may be helping the equity market.

Q: What key indicators should we look at? Job growth? CPI [consumer price index]?

The big picture and the data are key. In a few weeks we have GDP for the third quarter, and sales figures released yesterday were not great, but job market numbers have been fairly consistent. Seasonal adjustments will be made, but overall for the big picture in the labor market, it is fairly encouraging. Inflation is remaining well-behaved which helps the Federal Reserve to stay accommodating for longer rather than shorter. GDP numbers seem to be coming in fairly solid. Overall, this is not the time to panic. We need to step back and look at the broad picture and not be driven by emotions.

Read an interview with Robert Johnson, CFA and director of economic analysis at Morningstar.

Q: Was the volatility yesterday attributed to anything in particular?

I wouldn’t necessary single out yesterday, but the volatility has picked up over the last month. Most days have been down with an occasional up day. Why some days up and some down? Some days we have bad economic data, and some people get excited because they think that means more quantitative easing so bad news is good news. Then they go back and look at the data and say, wait, slower growth means bad news. So this Jekyll and Hyde reaction to answering bad news with a positive response then changing it the next day results in volatility - means sometimes up and down on same data. That’s part of it. Obviously we have a market that has come up a lot since 2009, so naturally we may have a correction. Some can argue these months are the worst of the year. Economic data from around the world has gotten a lot worse, and I have always contended that this is not an overall bad thing. It brings down prices, which means less inflation and that is good for the consumer. Gas and food prices come down a lot and that is also good for the consumer. On the other hand, it will mean fewer exports to those markets, but Europe is about 3 percent of GDP and China is between 1 and 2 percent. One of the things that happened yesterday [was] there was economic data that looked poor out of the U.S. Retail sales numbers came in as a negative number so people thought even the U.S. is done. This wasn’t the case – it’s the way auto sales fell and we had one great month then one not so great month. Retail sales were down for the first time in a while and that got everyone going yesterday in my opinion.

Q: Does Ebola panic having any effect?

No, absolutely not. That is silliness. There have been a lot of other things that are worth worrying about. If Ebola ends up more contagious, it can make a difference, but that is like betting the sun won’t come up tomorrow. That didn’t affect the market in my opinion. 

View the Dow Jones Industrial Average from the past five days.

Q: Is Federal Reserve tapering to end?

Over the last four weeks, the U.S. economy has picked up some steam but Europe has gotten weaker. The taper is almost over – the Federal Reserve’s bond buying program at the pace of $85 billion a month. That’s kind of over. There were some hints that they will keep it going a little, but I’m not sure. That’s also in the Ebola camp- not affecting yesterday’s volatility. Over the last few weeks, people realized we won’t be getting this free money forever and the low interest rates.

Q: Oil prices dropped – what is the cause of this?

It’s a supply and demand question and has been going on for some time. We have more production, but we also have more efficient ways of getting energy and the economy is not that strong so that kept a lid on prices. Questions about Iran and Israel got oil prices hung up a bit. Supply is up here but demand around the world is not so hot and some are fighting for market share. Who knows if it can get much lower.

Interviews have been condensed and edited.

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