A year ago, in our critique of the third-quarter market, we began with the title of Shakepeare's "All's Well That End's Well," as the period had, indeed, closed on a high note. It was a far different story this time around, however. In fact, it all came apart in the three months since our last equity market review. Back then, we had just finished a flattish quarter and a higher six months, in which most of the major indexes had scored gains of 5%-7%. That was not very special, to be sure, but it was a lot better than the most-recent interim, which saw significant losses. In fact, the red ink was really flowing as the quarter drew to a close.
The damage was broadbased. In all, the 30-stock Dow Jones Industrial Average fell 12.1%. Unfortunately for the bulls, that was the smallest loss among the key U.S. equity averages, save for the Dow Jones Utilities, which ended largely unchanged. The interest-rate-sensitive utilities, it should be noted, benefited from a further drop in interest rates. That index will typically track interest rates, as high-yielding utilities are viewed as competition for fixed-income securities, such as bank CD's and bonds. Elsewhere, the story was far less cheery, as the NASDAQ lost 12.9%; the Standard and Poor's 500 Index shed 14.3%; the Russell 2000-the small-cap benchmark-fell 22.1%; the equally weighted Value Line (Arithmetic) Composite lost 21.0%; and the Dow Transports tumbled 22.8%. There were simply few places to hide. The equity market, started out the period on a weaker note, with stocks skidding in late July and early August, before seeing a succession of rallies and selloffs in the final six weeks of the quarter. For the most part, the Dow held in a range of 10,600 to 11,500 in the back half of the period, with the past fortnight seeing it stay nearer the low end of that range. In all, that 30-stock index, which lost 241 points on the final day of the period, fell more than 200 points on 18 separate occasions in the quarter. It was a forgettable three months in every respect-to say the least. All groups suffered, with the financial stocks and some cyclicals, notably the aluminums and the steels, taking a major drubbing on earnings concerns.
The problems are international in scope. To begin with, there is the further soap opera with Greece and, to a lesser extent, other distressed euro-zone members, notably Italy and Spain. There are also fears of slower growth in Japan and elsewhere in Asia, with worries of a possible hard landing in China making the rounds, as that emerging giant is seeing a slowdown in manufacturing. Finally, there are recession worries in this country. Our sense is that the odds of a downturn remain close to 50%.
There are more questions than answers as we go forward. And for the most part, the questions revolve around the continuing concerns about Europe, Asia (principally China as manufacturing fell for a third month in a row for the first time since 2009), and economic and profit uncertainties in our country. A big question may be whether or not such unknowns are discounted-and to what degree-in the current low level of equity prices. How much of the economic and profit shortfall risk is baked into the market will go a long way toward gauging the future susceptibility of stock prices to disappointing news-which is almost certain to be seen at times during the fourth quarter.
Opportunities often arise at such times. In fact, we sense that a good chunk of these concerns-especially the mixed outlook for third-quarter earnings (reporting season is about to begin in earnest)-is already factored into the market. If that is, indeed, the case, the high level of pessimism now in place could be providing a buying opportunity for intrepid investors.
