The S&P 500 was down 14% in the third quarter. Volatile trading was driven on a daily basis by the latest news from Washington or European capitals. In August and September, the Dow rose or fell by more than 1% on 29 days, and there were 15 days with final moves of more than 2%.
Corporate earnings have been strong. 2011 estimates call for earnings of nearly $100 on the S&P 500. At that level we can assign a reasonable valuation of about 11 times earnings to the stock market. Earnings growth will be more challenging going forward and estimates for 2012 are moving lower. Still looks like something near $110 next year.
Gross domestic product growth for the second quarter of 2011 was 1.3%. Consensus expectations for the rest of the year are around 2%. There is not a much wiggle room with GDP growth nearing a stall.
Commodities ended the quarter down 11.3%. Prospects of a slowdown in emerging economies including China remove price supports. Crude oil fell 17% to $79.20. U.S. oil prices have declined 32% from their 2011 peak. Gold sold off in September after hitting a record high in August.
The housing sector is finding a bottom. In July the S&P/Case-Shiller Home Price Index showed the fourth consecutive month of increases. Large city composites were up 0.9% in July over June.
The unemployment rate held steady at 9.1% in September. Over 100,000 jobs were added in last month according to the Bureau of Labor Statistics.
The Federal Reserve held short term interest rates near 0%. The yield on the 10-year Treasury note fell to 1.71%. With overall inflation in the U.S. running at around a 3.6% investors are effectively accepting a loss buying Treasuries but believe that the interest and principal are safe.
The dollar showed some strength in the third quarter as investors retreated from economic and financial uncertainty around the world. The dollar's strength came against emerging-market currencies in September. The dollar was also up against the Euro. The euro finished the third quarter at $1.3387, down almost 8% from $1.45 at the end of June.
Equities all over the world moved 17% lower in the third quarter. Emerging Markets fell 23%.
Please let us know if you would like additional information on any of the above.