Coverage: The stock market’s wild ride

This week has seen the return of volatility to the stock markets. As some investors are watching their portfolios shrink, they’re also wondering what exactly is causing the fluctuations. Coverage has been extensive, but here’s a quick sample from Thursday’s reporting.

Mark Scott said in his piece for The New York Times that investors were thrilled with Thursday’s return to stability after Wednesday’s sell-off:

United States stocks ended virtually flat on Thursday, after recovering from early losses — a steadying that came as a relief after a tumultuous day on world markets on Wednesday.

The benchmark Standard & Poor’s 500-stock index closed up 0.01 percent after opening down more than 1 percent on Thursday. The Dow Jones industrial average of 30 stocks ended down 0.15 percent.  The Nasdaq composite index closed down about 0.55 percent.  For the year, the S.&P. 500 is up 0.78 percent, while the Dow is down 2.77 percent.

Helping to buoy stocks were dovish remarks from James Bullard, the president of the Federal Reserve Bank of St. Louis, who suggested that the Federal Reserve could consider delaying the end of its bond-buying program when its policy makers meet on Oct. 28 and 29.

The Wall Street Journal story by Saumya Vaishampayan called stocks “choppy” after a sustained period of stability:

Thursday’s choppy action follows more than a week of volatility across financial markets that has come after months of relative calm. Sparking the latest volatility was more bad economic news out of Europe, where data showed eurozone inflation at a five-year low. The turmoil followed a wild ride for investors on Wednesday, which saw the Dow industrials drop as much as 460 points before partially recovering and the U.S. 10-year Treasury yield stage its biggest swing in five years.

Monica DiCenso, U.S. head of equity strategy at J.P. Morgan Private Bank, said stock-market fundamentals and economic data in the U.S. still support investing in U.S. stocks.

“The magnitude of this pullback is not out of line with what we’ve seen in the past,” she said, adding that investors should watch third-quarter corporate earnings, which should show that U.S. companies remain “relatively healthy.”

“Nothing suggests the broad U.S. economy is weakening substantially,” said Ms. DiCenso.

The Reuters story by Caroline Valetkevitch said that many investors are still cautious after the recent market performance:

But investors remained cautious, and the selloff could continue if U.S. earnings fail to ease worries about weak global demand. Investors also have been rattled by a widening Ebola scare and plunging oil prices. The S&P 500 is still off 7.4 percent from its Sept. 18 record closing high and is up just 0.8 percent for the year so far.

“A lot of the selling got done yesterday, whether it was forced liquidation or just scared money leaving the market … so it looks like it’s a short-term bounce,” said Bucky Hellwig, senior vice president at BB&T Wealth Management in Birmingham, Alabama.

“We need to see the S&P regain its 200-day moving average before we can say that the uptrend has been restored. Fundamentals are still somewhat negative.”

The S&P 500 again closed below its 200-day moving average of around 1,905.

Writing for Bloomberg Businessweek, Peter Coy said that the U.S. economy was still stable despite the recent market volatility:

The overall U.S. economy is far less dependent than the S&P 500 companies on what happens abroad. Most of what Americans produce is sold to other Americans; exports account for just under 14 percent of U.S. gross domestic product. As the world’s largest economy, the U.S. is far more insulated, according to 2013 World Bank data, than Germany, where exports are 51 percent of GDP, the U.K. (31 percent), or China (26 percent).

 (Oddly, most of the countries that are less export-dependent than the U.S. are economic failures with very little to export, such as Afghanistan and Burundi.)

“The U.S. economy is less open than the S&P revenue base,” Jan Hatzius, chief economist at Goldman Sachs, told Bloomberg. This cuts both ways. Until recently it was Wall Street that shone: The S&P 500 index roughly tripled from its nadir in March 2009 through September of this year. Meanwhile, the overall economy suffered, with weak job growth. Now that the U.S. economy is showing signs of life—and Europe, Japan, and China are slowing—the tables have turned. The U.S. economy is benefiting from domestic forces, which include job growth exceeding 200,000 a month, renewed corporate investment, and healthy household balance sheets.

Why look at exports, rather than imports? Because exports from the U.S. depend on the health of foreign customers. If they’re in a funk, they won’t buy. In contrast, the U.S. will continue to be able to import products from abroad, even if foreign economies are a mess. In fact, overseas vendors may even lower prices for American customers in order to preserve their market share.

If you believe this theory, stocks will stabilize once investors have a better grip on the fundamentals and portfolios will regain losses. But the European economy is still struggling and that’s making it hard for many people to figure out what to do. One thing is certain, the long period of stability is likely over and investors are in for a wild ride.