In the mid-19th century the crumbling Ottoman Empire led to the creation of term “the sick man of Europe” to describe that nation’s tattered economy. Today it is Europe as a whole that appears to be the sick man of the global economy as economic data continues to indicate slowing demand and activity, while the actions taken by the European Central Bank to restore confidence in lending markets have had little effect. A slowdown in China is weighing on the minds of investors as well but reflects a shift toward internal demand that is a normal maturation of the economy in that country rather than the deterioration seen in Europe, where the animal spirits remain caged.
Prices fall in Europe. Several primary European countries released consumer price inflation (CPI) data for September this morning. In France, prices at the cash register contracted on a month-over-month basis, rising an anemic 0.4 percent annualized, while in Italy the headline index was also lower than forecast, contracting 0.2 percent. CPI data in the U.K. were also softer than expected, with the headline index coming in at a 1.2 percent annual pace and core prices at 1.5 percent, versus forecasts of a 1.8 percent increase.
German sentiment sours. Germany’s ZEW index of investor and analyst expectations fell to –3.6, down from 6.9 in September. The investor sentiment index registered its tenth consecutive decline, reaching its lowest level in nearly two years, as the market assessment of the largest E.U. economy continues to deteriorate.
European industrial activity grinds lower. Industrial production data for the euro zone released this morning saw activity measures slip by a larger measure than forecast in August. Aggregate production contracted by 1.8 percent for the month, a nearly 2 percentage point contraction from the same month in 2013.
U.S. earnings season kicks into full gear. Large-cap equities reporting third quarter results this morning include financial services giants JPMorgan Chase, Citigroup and Wells Fargo & Co., as well as health product stalwart Johnson & Johnson. After U.S. equity markets close, investors will be closely watching the earnings announcement of CSX Corp. to try to gauge the likelihood of a discussed merger between the railway operator and Canadian Pacific Railway.
Beijing cuts rates. People’s Bank of China policymakers today reduced interest rates for 14-day repurchase agreements, the second cut within the past 30 days. With its sale of 20 billion yuan ($3.26 billion) at a 3.4 percent interest rate today, the central bank attempted to increase liquidity, as both the private sector and local government investment entities unwind debt in the shadow banking sector at the urging of regulators.
Portfolio Perspective: Can Anyone Predict the Stock Market? — Sean Chaitman, Shelter Rock Management
Unfortunately, we have yet to find a crystal ball that can help us answer the magical question: Can anyone predict the stock market. No one can accurately predict whether or not employment, inflation, interest rates, oil prices or the U.S. dollar will exceed or disappoint investor expectations in the next six to 12 months. It is not possible to consistently determine if, when and how the Federal Reserve will implement its monetary policy changes in upcoming meetings. The Fed’s voting members will base these decisions on the results of future economic data. Random positive and negative events (unusual weather patterns or acts of war) that affect the economy are also unpredictable.
In the short-term, it is quite possible that the stock market will achieve an annual return that falls well outside of its long-term average. Over the past 50 years, the S&P 500 Index has had a 10 percent annualized rate of return. Some of these years have significantly exceeded the long-term average and others have woefully underperformed it.
Sean Chaitman is the chief investment officer for Jericho, New York–based Shelter Rock Management.
