With no fresh economic data to provide drag, stocks are rebounding somewhat following two days of steep losses. But gains have been modest so far compared to recent swings (the average daily move for the Dow since the beginning of September has been plus or minus 298.77 points).
The rise in stocks has helped justify profit-taking in Treasuries this morning following steep gains in the last five sessions. The yield of the benchmark 10-Year Note declined by 31/100 yesterday (yield moves inversely to price) and in recent trade this morning, it had risen by 20/100.
There are no major economic releases slated for today. While there is no guidance from new indicators, it does not mean that the markets will not be volatile. Stock traders are looking for a turning point to the downtrend that, as of yesterday, had pulled the Dow down by 6,612.24 points or 46.68% from its October 9, 2007 record high of 14,164.53. More than half that loss came in the last three months.
But the overriding view of the economy is bearish. This view has been confirmed by a growing string of weak economic indicators -- many at record low levels. The weakness is widespread. The financial sector has been hit by the credit crisis stemming from poorly performing mortgages and the securities backed by them. Manufacturing, construction, and the service sector are all contracting. Unemployment is rising and consumer spending is falling.
The severity of the situation has been underscored by the extraordinary measures already taken by the Treasury and the Federal Reserve. There has been an economic stimulus package for taxpayers, a sharp reduction of interest rates, numerous new vehicles instituted for lending money to businesses including a major bailout package. Moreover, the situation has had global effects which have spurred actions by foreign central banks as well.
Against this backdrop, stock traders are caught between fear and hope. Government debt securities (Treasuries) have benefited from the retreat out of the stocks. The demand for the safety of Treasuries has pushed yields to historical lows. Today, however, bond traders are cashing in on recent gains.
Oil futures are up this morning but the January contract (the new front-month future) is currently still below $50.00 per barrel.
Thursday, 11/20/08 : Stocks had a choppy trading session as bad economic news contended with the lure of low prices and conflicting opinions regarding a bailout for the auto industry. But pessimism prevailed once again and the indices moved sharply lower late in the session to close near their lows of the day. Treasuries kept their safety appeal throughout their trading session and prices soared.
In late trading, the 10-Year Treasury Note was up by 2-22/32, lowering its yield by 31 basis points to 3.01%; the Dow was down by 444.99 points to 7,552.29; and the Nasdaq was down by 70.30 points to 1,316.12.
Yesterday's economic news was uniformly bearish. The level of initial jobless claims hit a sixteen-year high last week and the level of continuing claims in the preceding week was the highest in almost twenty-six years.
The Index of Leading Economic Indicators fell more than expected last month. Lastly, the Philadelphia Fed Index on the region's manufacturing sector for this month revealed the strongest contraction of activity in eighteen years.
While stocks were hit by the economic data, some support came from talk that a bailout of the auto industry might be at hand. But later word was that a rescue was not assured and that the uncertainty would not be resolved until sometime next month at the earliest.
Oil futures declined on the weak economic news that further dimmed demand estimates for the commodity. Though lower prices are an economic stimulant, the reason behind the decline constituted another bearish indicator. The decline also specifically hurts the energy sector of the stock market.
In Thursday's trading action, the price of a barrel of light, sweet crude oil for next month delivery fell by $4.00 on the New York Mercantile Exchange to settle at $49.62. In the last five sessions, it has fallen by $8.62 and yesterday's close was the lowest for a front-month contract since May of 2005. The contract expired at the end of trading and the one for January delivery becomes the front-month contract today. The January contract closed yesterday at $49.42 per barrel.
By the end of stock trading, the Dow had lost 5.56%; the Nasdaq, 5.07%; and the S&P 500, 6.71%. The Dow and Nasdaq closed at their lowest levels since March of 2003 and the S&P 500 closed at its lowest level since April of 1997.
The stock market's losses have been the bond market's gains. In the last five trading sessions, the yield of the benchmark 10-Year Note has fallen by 84 basis points (yield moves inversely to price) and yesterday's close was the lowest in decades. The 30-Year Bond yield closed at 3.49%, 4 basis points lower than where the 10-Year Note yield closed two days earlier . . . .
