By David Randall
NEW YORK (Reuters) - The global market
volatility of the past month that sent U.S. stocks to their worst
quarter in four years shows no signs of letting up just because the
calendar turned to October.
Investors say they are bracing for another leg down in the S&P 500 stock index despite its positive showing last week by increasing cash and other defensive positions in their portfolios.
"Do
I think we go into a bear market? No. Can we inch toward it?
Absolutely," said Peter Cardillo, chief market economist at Rockwell
Global Capital in New York.
With the backdrop of slowing jobs
growth in the U.S. and the collapse of global commodity prices, third
quarter corporate results will take on a heightened significance when
companies begin reporting them next week, analysts said. Alcoa Inc (NYSE:AA),
traditionally the first company to report its results, is scheduled to
announce its third quarter earnings after the market closes on Oct. 8.
Overall,
corporate earnings are expected to fall by 4.1 percent, according to
Thomson Reuters data. That figure is skewed, however, by an expected 65
percent fall in energy sector results.
"The single most
determinant variable is going to be earnings at this point," said Mark
Freeman, chief investment officer at Dallas-based Westwood Holdings
Group. He has been raising his cash levels, and at the same moving more
of his portfolio into healthcare and technology companies that show
signs of growth.
"The market continues to narrow and narrow.
We're not about to fall into a bear market, but I'm starting to think
the raging bull market is over," he said.
A weaker than expected
U.S. employment report for September on Friday diminished inflation
expectations, and the prospects for a dim U.S. corporate earnings
season, are all factors fanning worries that the economic recovery could
be derailed.
Concerns about the global economy has fueled a
series of deep declines and snap-back rallies over the last month, as
investors look for surer footing. The S&P index had fallen more than
10 percent from the record high it reached May 20, and after starting
with a selloff on Friday, closed up 1.42 percent, still down 8.6 percent
from its recent high.
Investors pulled $22 billion out of U.S.
equity funds in the third quarter, while putting a record $17 billion
into U.S. Treasury funds, according to Bank of America Merrill Lynch
(NYSE:BAC).
Those
investors have had few places to hide. Of the 21 major financial asset
benchmarks tracked by Reuters, only two - the U.S. dollar and 10-year
U.S. Treasury bonds - have posted positive returns so far this year,
leaving investors with the worst financial market returns since the
financial crisis in 2008.
The yield of the benchmark 10-year
Treasury fell below 2.0 percent on Friday for the first time since late
August on concerns about growth in the U.S. economy.
"There are
some wicked winds swirling around from a macro perspective and you can't
afford to be complacent," said Alan Gayle, head of asset allocation at
Atlanta-based RidgeWorth Investments, who said he has been raising the
cash levels in his portfolios until the market stabilizes.
The
Federal Reserve's decision in September to delay raising interest rates
from financial crisis-era levels is exacerbating the uncertainty behind
the market's large swings, said Jonathan Golub, chief U.S. market
strategist at RBC Capital Markets.
"The market wants to see the
economic conditions normalize. It's starting to think that something is
broken here and it makes them uncomfortable," he said.
Fedwatchers
suggest Friday's lackluster jobs report would cause the Fed to further
delay raising interest rates until 2016, prolonging market volatility
into next year.
To be sure, some investors say that heightened volatility is welcome.
"This
can create wonderful opportunities, and we're actively looking to take
advantage of egregious pricing," said Connor Browne, managing director
of equities at fund manager Thornburg Investment Management.
