Preliminary estimates for third quarter GDP growth showed a 0.4% contraction. This was the first in ...
Preliminary estimates for third quarter GDP growth showed a 0.4% contraction. This was the first in eight years but wasn't as severe as many expected.
September economic data began to reflect the impact of the terrorist attacks on the US consumer. Retail sales were 2.4% lower than in August, with clothing stores reporting a 5.9% slump.
However, it is too soon to tell whether this is simply the result of the 'CNN effect' ' consumers staying at home to watch the news ' or the beginning of a long-term contraction in consumer spending that could have severe implications on global growth prospects.
The labour market remains a key factor and the rate of unemployment in October jumped to 5.4% from 4.9% in September. Payroll data in September had already confirmed conditions were weakening even before the attacks and, given the number of layoffs subsequently announced by cost-conscious companies, a further deterioration was not entirely unexpected.
Consumer confidence has been badly affected. The latest survey, conducted by the Conference Board, showed confidence levels at a seven-year low, although this is likely to have been compounded by the threat of anthrax attacks.
The Treasury's surprise decision to refrain from issuing any more 30-year bonds (causing a sharp rise in long-dated bond prices and a steep fall in yields) should provide additional support to the housing market and encourage more companies to refinance existing debts and raise fresh funds for investment.
This monetary easing, coupled with increased fiscal expenditure, should help prevent the economy from sliding into recession and support a recovery into the first half of 2002.
Equity markets extended September's month-end rally into October as investors took advantage of attractive valuations to increase their exposure to some of the more cyclical sectors that had suffered large losses in previous months. Some better-than-expected third-quarter earnings reports and reaffirmed guidance from industry leaders such as Microsoft, IBM and Cisco added to the momentum in the technology sector, although companies that fell short of expectations, such as Amazon.com and Global Crossings, were severely punished.
The Nasdaq composite ended the month 12.8% higher at 1,690.2, while the S&P500, weighed down by underperforming healthcare, consumer staple and banking stocks, rose just 1.8% to 1,059.8.
We anticipate markets will remain volatile in the near term as some investors opt to take profits after recent gains. Although third-quarter corporate news was generally disappointing, there are signs that expectations and reality are beginning to converge: companies have become better at managing investors' expectations and negative pre-announcements are tailing off, while analysts' estimates, which were slashed after the terrorist attacks, appear to be approximating realistic levels.
On a twelve-month view, we expect the combination of abundant liquidity and attractive valuations relative to bonds to drive equity markets higher.
Stimulatory monetary and fiscal policies.
Abundance of liquidity.
Corporate earnings nearing trough.
Unemployment on the increase.
Political uncertainty to continue.
Risk of further terrorist disruption.
Chris Galleymore, US fund manager at Henderson Global Investors
Since November 2008
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