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The sell-off: so what’s next?
by Peter Switzer
The Dow Jones index finished in positive territory following a better-than-expected jobs report but this followed a rollercoaster ride with the index going up and down in a 416-point range. And this preceded the Standard & Poor’s decision to drop the US credit rating from AAA to AA+.
The Dow was up 60.93 for the day but lost 5.75 per cent for the week and is down 1.15 per cent for the year to date. The S&P 500 at 1199.38 is down 4.63 per cent for the year to date, while our S&P/ASX 200 is down more than 13 per cent!
And it’s expected there will be a negative market reaction to this downgrade news today as it should affect US borrowing rates going forward, but there is confusion as the other debt ratings agencies — Fitch and Moody’s — have not moved to follow in the downgrade action.
So why did this happen? The assault on Italian and Spanish bonds as a direct result of the EU’s second-rate sovereign debt rescue plan, as well as the respective countries’ fiscal policy responses in total raises doubts about future bond prices and yields. That gives room to speculators and they do what they do.
On top of that, the financial markets are not impressed with the debt ceiling and deficit reduction plans that eventually came out of the dysfunctional US Congress. These very plans brought the reaction from Standard & Poor’s we saw over the weekend.
On top of that, the very action of fiscal restraint, albeit that it’s not as good as the experts want, does mean the US economy will face less demand and economic growth. This in turn hits consumers as well as business profits and therefore share prices.
Of course this comes as the US could be heading for a double-dip recession and so any new reason to focus on the weakness of the American economy is not good for share prices. Traders on Wall Street are starting to ponder an issue I raised last week in my columns, and that is — will the Fed boss, Ben Bernanke, opt for QE3 to kick-start growth?
Goldman Sach’s chief economist, Jan Hatzius, doesn’t expect a double-dip recession, speculating that US growth will be around two per cent in the second-half. He also expects some action from the Fed to create more economic growth.
I know it’s hard to cope with these troubled times for financial markets but provided you are a long-term investor, the market will rebound. On Friday, fund manager Roger Montgomery told the Trading & Expo audience at the Sydney Convention Centre that he was buying into the sell-off on Friday.
Geoff Wilson of Wilson Asset Management, a long-time bear, believes the bear market ends in 2012 and expects a big bounce back in 2013. He says a bear market always ends with a big surge for shares.
I believe we’re looking at a typical and big market overreaction and the jobs numbers out of the US half-suggests this. With all the apparent doom, 117,000 jobs were created in July and the unemployment rate dropped to 9.1 per cent.
This week we need to see some decisive EU action to support Italy and Spain and some positive talk from the Fed’s FOMC meeting on US monetary policy.
Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
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Published on: Monday, August 08, 2011
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