The US equity market started October in relatively strong style. The S&P 500 index reached a new one-year high towards the middle of October, while the Dow Jones Industrial Average index rose above the psychologically important 10,000-point level for the first time in a year during the month. Investors drew encouragement from reassuring economic data and unexpectedly strong third-quarter profits announcements. However, towards the end of October, share prices subsided sharply as investors became uncertain about the strength and sustainability of economic recovery.
The US led the world into recession and is now tipped to lead the world into recovery. The US economy registered growth of 3.5% during the third quarter, having contracted by 0.7% during the second quarter. US retail sales posted a smaller-than-expected decline during September, boosting hopes that US consumers will spearhead economic recovery in the country. Nevertheless, Donald Kohn, vice chairman of the Federal Reserve, warned that short-term growth in consumer spending is “likely to be muted”. Meanwhile, as expected, car sales plummeted following the expiry of the government’s “cash for clunkers” programme.
Minutes of the Federal Open Market Committee’s (FOMC’s) September meeting indicated some policymakers have misgivings about the strength of the recovery and the committee might consider increasing purchases of mortgage-backed bonds in order to support the housing market. The FOMC reiterated its pledge to maintain the current low level of US interest rates “for an extended period”. The rate of unemployment climbed to 9.8% during October while recent data showed the US economy has lost more jobs since December 2007 than at any time since the Great Depression.
Some four-fifths of companies in the S&P 500 index reported better-than-expected results during October. The world’s biggest software manufacturer, Microsoft, announced a smaller-than-expected fall in profits after cutting costs to offset a decline in sales while online retailer Amazon reported net income rose by 69% during the third quarter, compared with a year earlier.
The third-quarter earnings season provided some positive surprises for the banking sector, with Goldman Sachs announcing third-quarter earnings that beat consensus estimates. The company attracted criticism after reporting it had earmarked $16.7bn (£10.1bn) to pay its employees so far this year. Meanwhile, JP Morgan Chase announced a seven-fold rise in third-quarter profits, driven by record revenue streams from fixed income activities. Elsewhere, Citigroup – which is 34%-owned by the US government – surprised many analysts by reporting a profit rather than a loss.
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