September Market Commentary: Mixed Economic News Signals a Protracted but Potentially More Robust Recovery
By Natalie Trunow, Chief Investment Officer, Equities
Calvert Asset Management Company, Inc.
During September, the U.S. equity market continued to rise, with the Standard & Poor’s 500 and Russell 1000 Indexes increasing 3.6% and 2.6%, respectively. Economic trends that were playing out in August translated into mixed economic data in September. For example, September’s Commerce Department data indicated that in the second quarter of 2009, the U.S. economy shrank at a lower-than-anticipated 0.7% annual rate, a sharp improvement from the 6.4% decline during the first quarter. The “cash for clunkers” program was considered a success, but may have “borrowed” from future car demand. Also during September, the National Retail Federation reported that retail sales rose by a more-than-forecasted 2.7% between July and August.
On the negative side, the Institute for Supply Management (ISM)-Chicago Purchasing Managers Index posted a significantly lower-than-expected 46.1 quote, which was below the most pessimistic forecast and signaled a contraction in manufacturing. On the real estate front, the National Association of Realtors reported that sales of existing homes also fell unexpectedly—dropping for the first time since March. Payroll data also disappointed, with 254,000 jobs lost in September—more than the 200,000 forecast, but less than the declines in previous months. Despite slowing payroll losses, the unemployment rate rose to 9.7%—unfortunately, nearing our year-end forecast of between 10% and 11%, and impairing the chance for a consumer-led recovery.
The financial services sector remained a focus for regulators worldwide. Regulators strongly indicated a continued crackdown on risk-taking and compensation levels at banks. We expect this to put significant downward pressure on margins for the sector in the near future.
At the end of the month, markets reacted negatively to the mixed economic news, suggesting a potential correction from the market’s recent highs. Stock valuations reached pre-crisis heights, with unprecedented two-year 20%-plus earnings growth expectations factored into both 2010 and 2011 earnings forecasts. Given these valuation levels, the current mixed economic data, and the significant rally off the market’s lows of March, we are cautious about the prospects for short-term market performance. For the long run, however, we continue to expect a protracted and slow—but more robust and sustained—“smile-shaped” economic recovery.
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