Market Update

The precipitous drop in the markets in the third quarter of this year was underpinned by three major concerns.  First, sovereign debt in Europe, with fears of Greece default in the near future.  Second, possibility of U.S. sliding into double-dip recession.  And finally, decelerating earnings of U.S. companies.  So where do we stand now?

Let’s start on domestic front first.  A number of better than expected economic reports dispelled fears of immediate recession.  Consumer spending was better than expected, unemployment claims dropped below psychologically important 400,000 mark, and GDP grew at 2.5% rate, much faster than in the first half year.  While growth is still slow, it is clear that a recession is not anywhere close.

The earnings season is now almost over, and it marks 11th straight quarter of positive surprises.  Earnings rose 17% year-to-year, and revenues increased 11%.  More than 70% of companies reporting beat earnings estimates.

Turning our attention across the pond, European leaders worked hard on containing the debt crisis and reached an agreement with banks to take 50% loss on Greek debt in exchange for more austerity measures in Greece.  This was thrown into turmoil last week with Greece’s prime minister flip-flop with the referendum on the deal and his subsequent resignation.  Nevertheless, it appears that this deal will go through; however, the markets immediately turned their attention to Italy’s debt issues.  They are not as dire as Greece’s, but given the size of Italy’s economy, the repercussions for European and world economy can be severe.

Given a respectable performance of U.S. economy, good earnings reports, and at least some progress in Europe, markets erased most, but all, of the decline in Q3.  At this point, it appears that the major drivers of the equity prices will once again be news coming out of Europe, which suggests continued market volatility in the near term.