Monday Morning Outlook

Stocks were down on four of the five trading days last week, and October finished as the first down month for the market since February.

The Dow lost 259.45 points last week, or 2.6%, to close at 9,712.73. The S&P slipped 43.42 points, or 4.0%, ending at 1,036.11. The NASDAQ dropped 109.36 points, or 5.1%, to close at 2,045.11.

On the only positive day of trading last week – Thursday - investors were enthusiastic over news of a stronger-than-expected report on the growth of the economy. Indices pushed higher by more than 1.8% each, with the Dow adding nearly 200 points, the best showing in more than three months.

But the remainder of the week was affected by poor economic readings, including worries within the housing markets that rekindled concerns over the strength of recovery. Selling pressure accelerated after poor showings from consumer sentiment and spending reports.

Sales of new homes throughout the country plunged unexpectedly in September, falling 3.6% to an adjusted annual rate of 402K units. That figure comes in well under the August rate of 417K, which was below the 440K pace that economists were anticipating.

With more than 251K new homes for sale by the end of September, the lowest amount in nearly 17 years, the median sales price of those homes was $204,800. That’s down more than 9% from the previous year’s mean selling price of $225,200. However, the recent price did reflect a 2.5% increase from the August price of $199,900.

On the labor front, the number of newly laid-off workers filing for insurance benefits decreased by a moderate 1,000 to a seasonally adjusted 530K. Economists were looking for initial claims to fall to 521K. Meanwhile, the total number of people continuing to receive benefits receded by 148K to 5.8M claims. Some economists are predicting the unemployment rate to inch higher in October, up to 9.9% and could reach as high as 10.5% by the middle of next year.

On a positive note, orders for big-ticket goods climbed for the second time in three months. Durable goods orders increased 1% during September, led by the biggest jump in demand for machinery in the past 18 months (7.9%). The 1% gain matched analysts’ expectations, following a 2.6% decline in August. Not including transportation, durable orders increased 0.9%, slightly ahead of the 0.7% gain economists had forecast.

Furthermore, GDP expanded at a 3.5% rate during the 3Q, solidifying its best performance in more than two years. The push towards a positive showing was fueled by government-backed incentives for ‘Cash for Clunkers’ and tax credits for first-time homebuyers. Economists were anticipating a 3.3% growth rate in GDP for the recent quarter.

Consumers benefited from the government programs as spending on durables jumped 22.3% during the quarter, while spending on housing surged 23.4%. The huge increase on big-ticket manufactured goods was the most since the end of 2001, while spending in the housing markets was its best showing since 1986.

Despite the overall increase in consumer spending during the 3Q, cash-conscious shoppers were more frugal in September. Aggregate spending fell 0.5%, its largest decline in nine months. The 0.5% decrease in spending follows a 1.4% surge in August, which was helped by the auto and housing incentives. Adversely, personal incomes, the backbone to future spending, was flat in September as employees remain concerned over rising unemployment and wage freezes.

The current depression in the jobs market has proven to be a bit of a benefit to employers. Employment costs, expenses related to wages, health care and other benefits, increased by 1.5% in the year ending in September, the smallest increase since such records began in June 1982.

The week ahead features more earnings as well as the crucial October Employment Report. Construction Spending, Pending Home Sales, Factory Orders, Wholesale Inventories, and Consumer Credit reports for September are due at as well.

The week will also include the ISM Index, Auto/Truck Sales, ISM Services, and ADP Employment for October, along with the preliminary reading for Productivity for the 3rd quarter. Weekly results for Initial Claims and Crude Inventories are on schedule as always.