The third quarter started on a volatile note in the capital markets as investors tried to gauge the direction of the economy and stock market. July was a roller coaster ride for stocks, but August and September were mostly constructive after a stock market rally began late in July. Oddly enough, the catalyst for the rebound was continuing economic weakness.
Economic Weakness Spurs Stocks
Preliminary second quarter GDP statistics were released on July 27th with 1.5% growth. Because this rate of growth was so weak, traders believed the Fed would have to step in with a new stimulus program, and the stock market rallied on those hopes. Additionally, further weakness in Europe, mostly in Spain and Italy, drove European Central Bank president Mario Draghi to announce that the central bank would do “whatever it takes” to avert a collapse of the Euro. The Dow rose over 200 points that day. Government intervention and bailouts are not the ingredients of strong, healthy economies, but they are effective at propping up capital markets in the short run.
Of course, all the speculation in July regarding a further government stimulus package proved prescient. Not only did the Fed announce an open-ended mortgage bond purchase program in September, but Europe and Japan also enacted new stimulus measures late in the quarter. The result was a lift in global asset prices, with depressed international stocks leading the way.
The quarter ended with more volatility in the aftermath of the stimulus news. On the one hand, there was bullish economic news. Home prices were up 6.9% and consumer spending rose 3.3% year-to-date. Both statistics grew at rates not seen in at least six years. However, on the bearish side was continuing strife in Europe. Greece and Spain both saw demonstrations, in some cases violent, over austerity measures put in place to remedy their ailing economies. Stocks see-sawed in reaction to these divergent events.
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