MANHATTAN (CN) — A perfect storm of negative news pummeled investors this week, as markets closed out the typically volatile month of September on a sour note with potential for a better October on the horizon.
The decline on Wall Street began early in the week: On Tuesday, the Dow Jones Industrial Average fell 571 points as bond yields on the 10-year Treasury bond started to spike to nearly 1.8%. The yield has since dropped, and it currently hovers around 1.5%.
Wednesday meanwhile brought darkened clouds over the Senate’s deliberation of the Biden infrastructure plan and the impending debt ceiling. The Dow shed another 500 points.
Markets recovered some of those earlier losses on Friday, with the Dow gaining 471 points, a 1.4% increase, and the S&P and Nasdaq increasing 49 points and 118 points, respectively. However, all three indices were down for the week, with the Dow falling 483 points overall, the S&P 500 declining 98 points, and the Nasdaq shedding 481 points.
The week was riddled with a perfect storm of negative news for investors, from the continued effects of the delta variant of Covid-19 on the supply chain, to the stalemate on Capitol Hill and a drop in consumer confidence.
“Markets do well when things are calm and belief in the President is high,” wrote James Vogt at Tower Bridge Advisors. “Consumer confidence has more power than one may think.”
On Friday, the University of Michigan released its final consumer confidence index for September, which showed a slight increase to 72.8. It is still nearly 10 points lower than it was in July, however, and inflation expectations remain unchanged from the two prior months.
“The two characteristics that facilitated the rise in inflationary psychology a half century ago was the wide-spread belief in personal financial progress, as well as the expectation of escalating inflation rates over the longer term,” the survey’s chief economist, Richard Curtin, said in a statement. “Neither of those conditions are now true.”
He noted a confluence of factors — some pandemic-related, while others are self-inflicted by lawmakers on Capitol Hill — has caused the dent in confidence.
“The reaction of consumers to rising prices has been to postpone purchases given their fears of falling future living standards, as well as the presumed transient nature of inflation due to the pandemic,” Curtin said. “The partisan wrangling about debt ceilings and infrastructure programs, along with rising market interest rates, will produce greater negative spending forces, unless quickly reversed.”
Similar results were reported by the Conference Board’s consumer confidence index, which fell almost 6 points to hit 109.3, the weakest reading in seven months. Consumers remain mixed on the labor market, with about 55% of respondents saying jobs are “plentiful,” and only one-fifth of respondents expect more jobs to be available in the months ahead.
“Concerns about the state of the economy and short-term growth prospects deepened, while spending intentions for homes, autos, and major appliances all retreated again,” said Lynn Franco, senior director of economic indicators at The Conference Board, in a statement. “Consumer confidence is still high by historical levels … but the index has now fallen 19.6 points from the recent peak of 128.9 reached in June.”
Many of the same factors driving down consumer confidence have caused investors to become bearing on equities, experts say.
One of the biggest issues this week was the failure on Capitol hill to pass the $550 billion bipartisan infrastructure bill, which has foundered due to moderate Democrats Joe Manchin and Kyrsten Sinema refusing to sign onto the $3.5 trillion reconciliation bill. Congress passed a bill on Thursday extending the government through early December, but experts say the stalemate is taking its toll on Wall Street.
“The key to the puzzle is still Manchin and Sinema,” wrote Paul Ashworth, chief North America economist at Capital Economics. “At one point it looked like Manchin would torpedo the stimulus passed back in March, too, but he ended up being satisfied with some minor changes in the bill.”
Ashworth noted that Manchin seems to be spoiling for a longer fight with his Democratic colleagues this time, and if he and Sinema “don’t fall into line quickly, the Democrats will descend into open warfare and neither bill will get passed.”
The protracted fight over infrastructure also has distracted Democrats from addressing the debt ceiling, which faces a mid-October deadline that fast approaches. “On balance, we still think someone will blink before the Treasury is forced to default on its debts, but we are a lot more worried about the possibility of default than we were a few weeks ago,” he wrote.
Another bad sign is that unemployment has ticked up for three consecutive weeks. According to the Labor Department, 362,000 initial unemployment claims were field for the week ending September 25. The prior two weeks 351,000 and 335,000 claims were filed after the low point of 312,000 claims were filed for the week ending September 5.
On the plus side, however, continued claims for regular state benefits declined 18,000 for the week ending September 11, with the four-week average hitting the lowest level since Marcy 21, 2020. Experts expect jobless claims to begin dropping again in the next couple weeks.
Others are more optimistic about the economic outlook in the fall, despite the currently dire situation. Experts like Lydia Boussour of Oxford Economics point to the roughly $2.7 trillion in excess savings among Americans as reason to believe consumer spending will keep growing at about 8% this year sand 4% into 2022.
“We think the U.S. consumer still has plenty of wind in his sails,” Boussour wrote. “In the coming months, an improving health situation should spur renewed consumer optimism while a resilient jobs recovery should support income growth.”
Vogt notes that the Dow, S&P 500, and Nasdaq are still up 15%, 11%, and 12%, respectively, for the year, with October and November likely to bring in even more gains as those months traditionally do.
“We’re not ending this quarter on a sour note [as] 5% to 10% corrections happen, especially after major averages double in price in just 18 months,” he wrote. “By the end of October, debt ceiling woes should be resolved. Stimulus bills will hopefully get approved before year-end as well.”
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