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Fundranker Blog—October Downturn

October Downturn

After hitting rally highs on October 19, the Nasdaq Composite and the S&P 500 Indexes turned down dramatically, falling seven of the last nine trading days of October. This downturn has not reached the point of calling it a correction, defined as a drop of 10%, but it did produce the first monthly loss for the market since this rally began in March. Several economic reports this week played into the downturn.

New home sales fell 3.6% in September, contrary to economists’ expectations of a seventh monthly increase in a row. Due to the coming November 30 expiration of the $8,000 first-time home buyer tax credit, potential home buyers may be rethinking their plans. Legislators are working now to renew the credit.

The Consumer Conference Board’s Consumer Confidence Index and the Reuters/University of Michigan Consumer Sentiment Index both declined in October, although the Nielsen Global Consumer Confidence Survey reported that their U.S. reading had risen since their last survey in July.

The only good news this week was that the GDP rose 3.5% in the third quarter, and it sparked a sizeable market rebound on Thursday, October 29.

However, the Labor Department reported Friday morning, October 30, that consumer spending fell and personal income was flat in September, which worried investors enough to undo Thursday’s rebound.

Even though the economy expanded in the third quarter, it is by no means out of the woods. Consumer spending is the mainstay of the U.S. economy and is directly affected by consumer sentiment, which in turn is affected by the current high unemployment rate, now at 9.8%, and which economists expect to continue to rise as high as 10.5% through the middle of next year. The recovery is likely to be weak and slow until the jobs picture brightens.

Remember though, that consumer sentiment is largely a trailing indicator, meaning that it reflects more on what has happened in the past than what will happen in the future, making it a favorite indicator for contrarian investors.

Posted 10/31/09 9:07am ET in Economy, Market