Market Talk

Is it just a correction, or is the bull market over, or was the bull market really just a bear-market rally? It’s the News Hub afternoon report.

US stocks sell off sharply, a day after rising sharply yesterday, as yesterday’s rally had no staying power, and the latest soundings on the consumer send disturbing messages.

DJIA falls 250 points, or 2.5%, to 9712, S&P 500 drops 2.8% to 1036 and Nasdaq Comp loses 2.5% to 2045. S&P breaks its seven-month winning streak. Today and yesterday also represented the first time since May that the Dow was up 2% one day, and down 2% the next. Still, the index scratched out a 0.45 point gain on the month, which means it’s been up four months in a row, and seven of the last eight.

Crude loses almost $3, gold falls as dollar strengthens. Readings on consumer sentiment and personal income and spending illustrate a worried consumer.And it’s becoming apparent that corporate profit growth is going to slide for a ninth consecutive quarter.

The S&P 500’s down a little more than 5% in the past week, and looking back, it seems like the long-expected correction has finally arrived. Right now it’s a minor one, but the real question is, will it be just a correction.

The problem for the bulls is there’s still no corporate earnings growth, and there are just too many people out there without jobs. Sure, jobs are a lagging indicator. But they could be lagging so much they drag the whole economy back down into the mud.

Addendum: Some late stats from the Journal’s markets group. The Dow was up or down by more than 100 points in six of the last seven sessions, the first time that’s happened since March 30. It’s also been down by more than 100 points in four of the last six sessions, the first time that’s happened since Jan. 14.

That’s volatility, and it helps explain why the VIX is spiking.

Despite an encouraging 3.5% 3Q GDP print, there’s still threats to the US economy, not the least of which is a now-chronically high unemployment rate.

But here’s one menace to the economy you probably haven’t been tracking: Stronger-than expected growth.

 Yup. We got trouble if growth turns out to be too strong, Morgan Stanley says, and it’s related to the massive amount of banks’ excessive reserves piling up on the Fed’s balance sheet. The firm expects excess reserves will soon pass $1 trillion.

And eventually a lot of it has to go somewhere else.

“Of all the policy dilemmas that confront central banks, reining in excess reserves likely worries them the least, given their experience and control in managing their own balance sheet,” Morgan Stanley says.

“However, the smooth transition that they likely assume is not a done deal, in our view. We have suggested that the biggest risk going forward is stronger-than-expected growth in the next few quarters,” firm says. ”Both the supply of and demand for bank credit in such a scenario could conspire to lay to rest the best laid plans of central banks.”

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Consumer’s are spending less, because their wages are flat, and that’s going to continue to hurt corporate sales and growth. Chevron’s earnings slide (but they still made nearly $4 billion) and the end looks near for CIT Group, one way or another.

It’s Tomorrow’s News Today.

Recovery's around the corner. Don't get stuck in the mud.

Is it just me, or is anyone else’s head spinning trying to figure out where the economy stands on this long and winding road to recovery?

Let’s recap this week’s data:

Conference Board reported Tuesday that consumer confidence fell for a second straight month, signaling folks are still worried as unemployment creeps closer to 10%. But Case-Shiller said housing prices rose for the third straight month, signaling some flickers of hope in the depressed housing market.

Of course don’t get too excited about housing. New-home sales unexpectedly fell in September following five consecutive increases. And orders for durable goods rose for fourth time in the last six months, but still remain down 24% year-to-date.

Then came yesterday’s all-mighty GDP report, which posted a better-than-expected 3.5% rise in 3Q, and prompted some folks to say the recession’s over. Consumer spending, believe it or not, fueled growth, as spending jumped 3.4% for the quarter on the heels of government stimulus.

“Housing is finally making a positive rather than a negative contribution, and nonresidential fixed investment was a smaller drag than I had been expecting,” UC San Diego economics professor James Hamilton writes at Econbrowser.

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They thought the worst was over, too.

It is over? Is the Great Recession over?

I don’t know. Neither do you, and anybody who says they do know is selling something.

There is absolutely no other honest answer. In journalism, you are discouraged from giving such an answer. Right or wrong, you are supposed to take a position and craft an argument that backs it up. That’s probably a relic of the Voice-of-God days for newspapers.

But with unemployment still rising, with consumers cutting back on spending and borrowing, with the biggest banks in the nation still operating by the grace of government largesse, with foreclosures still rising, with companies still getting smaller and holding off on any notions about hiring, who can say whether we’ve turned the corner based on three months?

Yesterday’s GDP report had some anxious types declaring the recession’s end. Yes, economic activity increased in the three months from July through September. But how was that achieved, and can that be sustained? It was achieved mainly through government spending. Is that sustainable? Well, it is in command economies.

It’s hard to know how bad the storm is when you’re standing in the middle of it. There were plenty of false dawns during the Great Depression.

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Bulls made it look easy in yesterday’s broad snapback, though upside follow-through may be tricky today. Calendar of earnings reports lightens up, and there’s a couple data releases with potential to influence US stocks’ direction this morning.

Yesterday we learned consumer spending was a firm plank for 3Q GDP,but we’re not sure how. Latest report on income and spending, for September, shows the first was flat and the second was down.

US dollar index just a shade lower, oil’s down. S&P futures down 4.90; DJ futures down 40. Ten-year higher, yield at 3.45%.

Chicago October PMI set for 9:45am, quickly followed by Reuters/Univ of Michigan final reading on Oct consumer sentiment at 9:55am.Busy next week, with a two-day FOMC meeting, Oct ISM, pending home sales, factory orders and Oct payrolls among the highlights.

And look out for the relative performance between the DJIA and indexes perceived as riskier, such as Nasdaq Comp and Russell 2000, for insight into how much this market really likes risk.

Yesterday, Nasdaq and Russell outperformed the DJIA earlier in the day, but by the close, Nasdaq’s gain — 1.8% — was smaller than the Dow’s. And while the Russell closed 2.5% higher, topping DJIA’s 2% rise, the spread between the measures narrowed from earlier in the session. The Russell has significantly underperformed the Dow all month, serving as a prime indicator of risk aversion.

DJIA is up 2.6% month-to-date, while the Russell is down 4%.

(Donna Kardos Yesalavich contributed to this post.)

When Wall Street gets done tearing apart the GDP report and figuring out what made it tick, I don’t think they’re going be very happy, I said on the News Hub today. And frankly, I won’t be surprised if today’s rally fades pretty quickly.

Like I wrote this morning, I want to see how good consumer spending looks when the consumer isn’t spending Uncle Sam’s money.

Bulls light it up again, turning another prior-day selloff into a buying opportunity. It’s become routine by now, but positive 3Q GDP and renewed punishment of the US dollar spark a flood back into all the stocks that got smoked yesterday. So much for those heightened concerns about the strength of a global economic recovery.

Emerging market stocks bounce higher than they fell yesterday, and oil nearly does the same. Meanwhile, the US dollar index relinquished almost all its gains yesterday. Financials go berserk to the upside, followed by materials and consumer discretionary.

If 10M folks weren’t collecting unemployment benefits, we’d think prosperity had broken out.

DJIA climbs 199.89 to 9962.58, and Nasdaq Comp adds 37.94 to 2097.55. S&P 500 ends 23.48 higher at 1066.11.

Bulls maintain stamina throughout the session.

Barron’s Bob O’Brien had a very astute observation this morning. He said bulls were facing their “stiffest test since the bears wrested dominion over the market from them nearly two weeks ago.”

Well, bulls passed this test with flying colors.

The Dow finished up 200 at 9963, closing near session highs and capping the biggest single session gain since July 15, when the index rose 257. S&P 500 gained 23 to 1066.

A better-than-expected GDP report alleviated concerns about weak housing and labor data seen earlier this week. The worries sent the S&P 500 down for four straight sessions and six out of the last seven.

The market recently has seen a pattern where stocks give up intraday gains and fall into the close. But stocks broke that pattern Thursday and rallied with momentum into the close.

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