Disappointing Commerce Department and Federal Reserve Reports Have Negative Impact On Markets

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Wednesday’s performance on U.S. stock markets, and global markets for that matter, is likely to have squashed any feelings of optimism that Monday’s market rally may have brought about. The Dow Jones industrial average fell 7.9 percent to close at 8,577, while the Nasdaq composite index lost 8.5 percent, and the Standard & Poor’s 500 dropped 9 percent. This tale of woe was echoed throughout the world, with London and Paris markets dropping around 7 percent, the German DAX falling 6.49 percent, and Asian and Pacific stock markets all recording losses.

Much blame for market volatility has been apportioned to the failure of the financial sector, and hopes for the economy’s recovery are being pinned on the various government-driven bailout plans. However, the most that can be hoped for is that these rescue efforts will stabilize the current volatile situation to some extent, they cannot be expected to correct far-reaching systemic flaws and failures. The reality is that no one can predict with any accuracy what the coming months will hold with regard to economic activity, including consumer spending, which is a driving force behind any country’s economy.The late in the day news on Wednesday that consumer spending, or retail sales, in the U.S. plunged by 1.2 percent in September, is seen by many as one of the motivating factors for the seemingly indiscriminate dumping of stocks toward close of trade. Analysts had been predicting that retail sales would drop by 0.7 percent, which in itself is bad news, but the actual figure of 1.2 percent is seen as a clear indication that consumers are reluctant, or unable, to spend money on anything other than the basic essentials. Considering that consumer spending makes up more than two-thirds of U.S. economic activity, the report from the Commerce Department pushed stock market player’s stress-levels sky-high. Another reason for the late afternoon sell off is that Mutual funds were obliged to unload stock to raise funds to pay investors who are pulling out of the market.

Further adding to the stress on Wednesday afternoon, the U.S. Federal Reserve released its analysis of country-wide business conditions – commonly referred to as the Beige Book – which confirmed what many have suspected, ongoing difficulties in obtaining loans has suffocated growth in multiple sectors of the U.S. economy. Therefore, attempts at financial sector stabilization should be viewed as just the first step in a long road to broader economic recovery – just how long that road will be, still remains to be seen.

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