September 2010
- The Fed gives a glum assessment of the US economy.
- Economic growth slows.
- Merger activity heats up.
Worries resurfaced about the durability of the US economic recovery during August. Equity markets slumped in response to mediocre economic data and gloomy predictions from the Federal Reserve. The S&P 500 index fell 4.5% in dollar terms over the month.
Eight of the index’s ten core sectors declined, with financials (down 7.9%) and industrials (down 7.3%) losing the most ground. Telecoms and utilities were the only two sectors to record gains, up 2.3% and 0.9% respectively.
During the month, markets moved in line with the Fed’s words and actions. Initially, investors reacted with optimism to comments from the central bank’s chairman. Ben Bernanke said that rising wages would help a recovery in household spending, despite low consumer confidence. But the tide turned after the release of the central bank’s latest monetary policy announcement. Interest rates were held to near 0%, but the accompanying statement gave the Fed’s gloomiest assessment for over a year on the health of the US economy. It referred to a slowing of output and employment in recent months and added that the recovery will be “more modest in the near term than had been anticipated.”
Near the end of August, a preliminary report on second-quarter growth revealed that the US economy expanded at an annualised rate of 1.6%. This was better than the 1.4% predicted by some analysts, but down on the Commerce Department’s initial estimate of 2.4%. Mr Bernanke said that in order to support the economic recovery the Fed was prepared to “provide additional monetary accommodation through unconventional measures, if it proves necessary”. This gave a small boost to flagging equity markets. But the mood soured on August’s final day of trading, when minutes from the central bank’s meeting earlier in the month revealed disagreement about the best way to handle the slowdown in the US economic recovery. Market-watchers thought the difference in opinion could make it hard for the Fed to respond appropriately.
In corporate news, merger and acquisition activity was under the spotlight during the month. Computer giants Dell and HP became involved in a bidding war to buy 3Par, a storage services provider. Elsewhere in the tech sector, Intel plans to buy Texas Instruments’ cable modem business for an undisclosed amount.
