October 6, 2014 by Bill Johnson
Just when it looked like the U.S. stock market was going to crack amid the pressure of a new array of risks, it found its footing and stabilized thanks to a handful of factors that acted like shock absorbers for the market.
Just three days ago, on the first day of October, a month that spooks investors because of stock market crashes in October 1929 and 1987, stocks were in free fall. Wall Street was buzzing about how far stocks could fall — and whether the benchmark S&P 500-stock index was finally on a collision course with its first 10% drop, or correction, since late 2011.
The world — and the stock market — appeared in chaos and disarray as a confluence of scary headlines rattled the nerves of even the most ardent Wall Street bulls, prompting a 238-point plunge Wednesday in the Dow Jones industrial average.
Pro-democracy protests in Hong Kong seemed on the verge of spinning out of control. The U.S. announced its first-ever diagnosis of Ebola on home soil. The small-cap Russell 2000 stock index — a bull market leader the past five years — fell 10% below its early March all-time high and into official “correction” territory. And weak manufacturing readings in Germany and the rest of the eurozone sparked fears of a global growth slowdown.
Fast-forward to today and the stock market appears far more stable, with stocks turning sharply higher amid fresh signs that the U.S. labor market — and the broader economy — may be in solid shape after all.
In early trading Friday, the Dow was up more than 140 points to 16,941, after climbing as much as 150 points earlier in the session. The Standard & Poor’s 500-stock index was up 0.9% to 1964 and the Nasdaq was up 1.2% to 4483.
What caused the tone of the market to flip from bearish to bullish virtually overnight? Here are five factors that have acted as shock absorbers for the fragile market at a pivotal time.
1. Blowout jobs report. Any concerns that the U.S. job-creation machine was stalling out went by the wayside Friday when the government released its September jobs report.
The U.S. economy created 248,000 jobs last month, topping forecasts of 215,000, the Bureau of Labor Statistics said. The unemployment rate declined to 5.9% — the lowest level since July 2008 — and better than the 6.1% forecast.
The government also revised up the weak August jobs report to 180,000 jobs from 142,000, and July job gains to 243,000 from 212,000. However, worker pay didn’t budge, as average hourly wage gains were unchanged. That signals that wage inflation remains tame, which is a bullish sign for stocks as it gives the Federal Reserve some ammunition to argue that speeding up the timetable for interest rate hikes might not be necessary, despite the strong reading on the labor market.
The upbeat jobs report also shows that the economy is not falling off a cliff and is still strong enough to support solid corporate earnings growth despite slowdowns in Europe and China.
“This morning there is a sigh of relief on both Wall Street and Main Street,” says Sung Won Sohn, a finance professor at California State University CI. “The jobs slowdown in August was an aberration and the economy is back on a healthier growth trajectory.”
2. Hong Kong protests don’t cause meltdown. The pro-democracy protests have not spiraled out of control, despite the ongoing standoff between the China-backed Hong Kong government and protesters. In fact, the size of the street protests appeared to be dwindling Friday after the Hong Kong government agreed to talks with the protesters. What’s more, the key Hang Seng stock index rose 0.6% to 23,064.56 Friday after steep selloffs earlier in the week and after markets were closed for two days for holidays tied to China’s independence 65 years ago.
Investors viewed both developments in Asia as a sign that the protests might not spiral out of control as feared and morph into an economic crisis.
3. Small-cap stocks rebound. Market pessimism peaked Wednesday when the Russell 2000 small-cap stock index closed down more than 10% from its March 4 record high of 1208.65, putting it into official correction territory. However, the small-cap index mounted a 1% rebound Thursday and is up another 1% today.
The rebound in what is considered a proxy for risk-taking on Wall Street suggests that the buy-the-dip mentality on Wall Street is not dead. It also downplayed fears that the small-cap selloff was going to drag down the broader market.
4. Ebola, a scare, but not a crisis. The first diagnosed case of the deadly Ebola virus in the U.S. has dragged down shares of airlines and other travel-related stocks, but Wall Street is still not treating the scare as a major economic crisis — at least not yet. Markets typically don’t sell off sharply unless there is a clear sign that a health-related epidemic has real, lasting negative economic impact.