If you took a 2-week summer vacation starting at the end of July, you could have missed the whole Q3 downturn. On July 28th the S&P500 was at 1,300. The next morning a revision of first-quarter GDP from 1.9 to 0.4% set off a selling stampede culminating in a test of 1,100 hit on the S&P on August 9th, when the FOMC announced it would keep rates low “through mid-2013.”
A GDP adjustment doesn’t typically concern Wall Street in the least. By the time the final revision comes out the data is so old that traders barely take notice. But going from 1.9% to 0.4% is huge; it’s an entire 1.5% difference, and this is economic growth we’re talking about. The data may be in the rearview mirror but when a global recession is gaining on you much faster than previously thought, investors are going to high-tail it out of stocks.
GDP set the stage for an ugly August which started with the debt ceiling/default debacle and led directly to the Standard & Poor’s downgrade of US debt, all in the first week. By the time the Fed conceded that the recovery was worse than expected and 2012 was looking grim as well, stocks were almost 20% off their 2011 highs. US equities haven’t recovered much since and have been joined in the dumpster by stocks worldwide and nearly everything related to global growth.
At this point, confidence is the only commodity in demand and none seems available at any price. The upside is things could have been worse. Really. The glass-is-half-full view is that stocks have been remarkably resilient under the circumstances.
Remember, all of the above occurred before Greece reemerged and the darkening picture in China became evident. Both will factor into whatever comes of Q4. Here are key dates to watch through year-end:
October 11th: Alcoa earnings report after the bell (signals the start of Q3 earnings season)
November 2nd: FOMC meeting followed by Fed Chairman Ben Bernanke’s quarterly press conference
November 23rd: Deadline for Deficit Commission proposals to cut $1.2 Trillion
December 13th: FOMC meeting, final one for 2011
December 23rd: Deadline for Congress’ “up or down” vote on Deficit Commission proposals
Remember, October is traditionally the month that sees the lows for the year. The bet here is that 2011 is no exception. I see stocks hitting 999 on the S&P 500, then finding some sort of base for a year-end rally. What’s my logic? The market likes big round numbers and I enjoy playing guessing games.
By Jeff Macke