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Stock Market Report For Week Ended August 28, 2015

Stocks see most volatility in four years but end with modest gain
The large-cap Standard & Poor's 500 Index ended the week with a modest gain but not before enduring the highest level of volatility in four years. The week's wild swings produced disparate results for the major equity market yardsticks, with the smaller-cap indexes roughly flat, and the technology-heavy Nasdaq Composite with a substantial gain. All of the major benchmarks sank into correction territory—or a drop of more than 10% from their highs—early in the week, a misfortune that only the Dow Jones Industrial Average and the Russell 2000 Index had suffered by the previous Friday. By the end of the week, however, all had crossed back over that threshold, and the Nasdaq Composite had even moved back into positive territory for the year to date.

China contagion continues at start of week
U.S. stocks plunged at the start of trading on Monday, with the Dow enduring its largest point decline in history (although nowhere near a record on a percentage basis). A dramatic sell-off in Chinese stocks rippled through Asian and European markets and then rattled Wall Street. Investors also reacted to a tumble in oil and commodity prices, sparked, in part, by fears about falling Chinese demand. Oil exploration and production stocks closed sharply lower, and metals shares fell even more. Risk aversion also took a toll on the fast-growing and richly valued biotechnology segment, which particularly weighed on the Nasdaq Composite.

Europe regains footing, but sentiment worsens further in U.S.
The lockstep movement of global markets broke down a bit on Tuesday—but not in a favorable way for U.S. investors. Chinese officials announced new stimulus measures, cutting interest rates and flooding the nation's banking system with liquidity. The announcement arrived after the close of another day of steep losses for the Shanghai Composite, but it appeared to help European markets regain their footing. U.S. stocks seemed to be following suit, but a morning rally faded even as investors received reassuring data about the U.S. housing market and consumer confidence. Indicative of the level of poor sentiment, a rebound in oil and commodity prices was unable to lift the majority of even energy and materials stocks—coal was the sole industry group to register a gain.

Sentiment finally turns
Several factors may have been behind a turn in sentiment on Wednesday, although it was difficult to pin down the precise factors behind the day's rally—the S&P 500's biggest daily gain in four years. T. Rowe Price traders pointed to a large merger in the beaten-down energy sector as well as further positive U.S. economic data in the form of solid durable goods orders in June and July as factors in the improved tone. Comments from Federal Reserve Vice Chairman William Dudley also appeared to deserve part of the credit. Markets turned back from a midday retreat after the key policymaker remarked that the case for rate increase in September was now "less compelling" given the unsettled state of global financial markets.

Technical factors accentuate upswing
Market dynamics, or so-called technical factors, may also have accentuated the market rebound just as they had the earlier decline. T. Rowe Price traders noted that further solid gains on Thursday were driven in part by short covering—or the move by short-term traders to buy back securities that they had sold short (borrowed and then sold, betting on the price to go down) in order to avoid losses as prices rose. A major rally in crude oil prices and a belated rebound in Chinese shares may have also boosted sentiment. News that the U.S. economy had grown at a solid 3.7% annualized rate in the second quarter, a significant upward revision to earlier estimates, also helped.

Planners urge staying focused on long-term goals
While the scale of the recent volatility has been extraordinary, T. Rowe Price U.S. equity portfolio managers were not surprised to see a market pullback following several years of significant gains that had pushed stock valuations to above-average levels. The firm's financial planners also remind investors that history suggests corrections occur on a regular basis but do not always turn into prolonged bear markets (defined by many as a decline of 20% or more). More generally, they urge investors not to panic or try to time the markets in such times of extreme volatility, but rather to stay focused on their long-term financial goals.

 

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