Investors are bracing for more large price swings across
stocks, bonds and commodities heading into a month that is associated with
market tumult. Stocks rose Wednesday, with the Dow Jones Industrial Average
adding 1.5%. The gains ended a third quarter that included the largest
percentage declines for U.S. stock indexes and the most volatility since 2011,
reflecting concerns about the pace of growth in China and elsewhere around the
globe.
Many investors said the U.S. economy is expanding steadily
and that stocks are likely to recover in coming months, as they have from past
retreats during a six-year-long stock rally. Few are expecting a repeat of
October swoons in 1929, 1987 or 2008. But two factors are giving some analysts
and traders pause and likely leading to further market swings: Wall Street
analysts expect quarterly corporate earnings will decline for the second
quarter in a row for the first time since the financial crisis, and financing
conditions are tightening in corporate-bond markets.
Together, the factors are causing stock investors who
previously snapped up shares at the first sign of a market wide pullback to
boost cash balances and wait for further declines. Some said they are worried
about valuations that remain high by historical standards, while others are
waiting to see if turbulence in the bond market and many emerging markets will
subside.
For the quarter, the S&P 500 fell 6.9%, the Dow
industrials dropped 7.6% and the Nasdaq Composite Index declined 7.4%. That is
the largest percentage falloff since the third quarter of 2011, when the
European debt crisis roiled financial markets. Despite the decline in stock
prices, many analysts don’t see stocks as a buy. Some are cutting earnings
expectations, adding to concerns about valuations.
Profits for S&P 500 companies slipped 0.7% in the second
quarter compared with the year-ago period, marking the first decline since the
third quarter of 2012, according to FactSet. Profits are expected to fall 4.9%
in the third quarter, which would be the first time since 2009 that earnings
fell two quarters in a row.
While the S&P 500 has fallen more than 5% since the end
of July, the S&P trades at 16.7 times the past 12 months of earnings,
compared with its 10-year average of 15.7, according to FactSet. In early
August, before the S&P 500 fell into correction territory—a loss of 10% or
more from a recent peak—the S&P 500 traded at 18.2 times the past year of
earnings.
Many analysts said other signals of a U.S. recession haven’t
materialized. They still expect the U.S. economy to expand at a modest but
healthy 2.5% annual rate this year and point out that unemployment is at its
lowest levels since early 2008. Consumer spending, a major growth driver, is
picking up.
Growth stocks—shares of companies that tend to reinvest
earnings into expanding the business instead of paying dividends—are also
faring better than the broader market, suggesting many investors still believe
the economy will accelerate.
Bond investors in recent months have demanded higher yields
relative to Treasurys to own highly rated U.S. corporate debt, indicating some
worry about companies’ ability to repay. This week, some companies canceled
bond sales, including the U.S. arm of Spanish bank Banco Santander SA and
shopping-center company CBL & Associates Properties Inc. Hewlett-Packard Co. sold
$14.6 billion of bonds on Wednesday, one of the biggest debt offerings this
year, according to S&P Capital IQ LCD.
Prices have dropped more sharply in the market for junk
bonds, those issued by lower-rated firms. Junk-bond trends in the past have
served as a leading indicator for broader economic conditions and stock-market
performance.
These companies carry more debt and have less financial
leeway to withstand an economic downturn. That makes the gap in yield between
these bonds and comparable U.S. Treasurys a widely watched metric of corporate
financial health that tends to foreshadow declines in the stock markets. On
Tuesday, it shot up to 6.34 percentage points, the highest level since 2012,
according to Barclays PLC data.
The extra yield investors demand to hold high-grade European
corporate debt over government bonds has jumped to its biggest level since July
2013, at 1.48 percentage points, according to Barclays data.
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