Recap of US Markets

Market tumbles (still)

This week had relatively good economic data, but it didn’t matter to equity investors. They seem engulfed in bad news, be it related to terrorism or corporate malfeasance. The S&P 500 and the Nasdaq composite have fallen to their lowest levels since late September. The Dow Jones Industrials are down sharply over the past several weeks, but not yet near the lows posted in the aftermath of September 11. The Russell 2000 has dropped sharply from the stellar levels it had been showing this year, but nevertheless remains the best performing of these major indices. Small cap stocks are still a sector that could post gains this year.

Reacting to the stock market

In the past couple of weeks, bond investors have come to the realization that the Fed is not likely to raise the federal funds rate target soon. Bond investors have priced out the hike that had been expected in August and are now looking towards November as the most likely month in which the Fed will raise rates. While this week’s set of economic news was good, the bulk of the economic data continue to point to a slow-paced recovery. Bond investors are also reacting to the downslide in the equity market. As long as the equity market is in the dumps, many investors will turn to the Treasury market as a safe-haven investment. This helps to push down Treasury yields.

The Treasury postponed the announcement and auction of the 2-year note pending the passage of debt-ceiling legislation that is stalled in Congress. Often bond market activity goes haywire when the Treasury messes with its schedule. Some thought that the 2-year note would feel the repercussions given that the auction didn’t go as planned, but other events are probably overwhelming this concern at the moment.