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On October 1st, we reached the end of a quarter and the end of a month. Both turned out to be favorable for equity markets. Although September is historically one of the slowest months of the year, this September wasn’t slow at all. Last week’s slight drop followed four straight weeks of gains that allowed the month to go down as the strongest September since the days of World War II – 1939 to be exact. For the month, the S&P gained 8.8%, the Dow rose 7.72%, and the Nasdaq advanced 12.04%. For the quarter, the S&P gained 10.7%, the Dow added 10.4%, and the Nasdaq rose 12.3%, even as the U.S. economic recovery remained tepid. Meanwhile, in a report released on Friday October 1st, the Securities and Exchange Commission and the Commodity Futures Trading Commission said that a large investor – left unidentified – used automated trading software to sell futures contracts called E-minis at a time in the afternoon when the markets were already stressed, and that this action sparked the "flash crash" of May 6. The report indicates that this selloff in the futures market then spilled over into the market for individual stocks. As conditions worsened, the liquidity in the market dissolved because automated systems used by many firms paused when prices began falling severely. The ensuing plummet sent the Dow Jones industrial average down nearly 1,000 points, and briefly erased $1 trillion in market value. It was the largest one-day drop on record. The SEC-CFTC report detailed technical factors that led to the market turmoil, but it did not contain any specific policy recommendations that would prevent another flash crash from happening. The report has been submitted to a special advisory committee, which will eventually make recommendations to Congress related to market structure issues and incongruent trading rules across various markets. Back in May, as an initial response to the crash, the SEC adopted a rule instituting a circuit-breaker “pilot” program for all exchanges to halt or slow down trades of a particular stock if the price moves 10% or more in a five-minute period. In September, the agency expanded the circuit-breaker program to all stocks of the Russell 1000 index as well as 344 specified ETFs. The SEC is expected to use the results of this new report to justify additional measures. If you’re feeling ambitious, you can read the full 104 page report from the SEC here: http://www.sec.gov/news/studies/2010/marketevents-report.pdf Or you can check out the edited summary from MarketWatch here: http://www.marketwatch.com/story/text-of-flash-crash-reports-summary-2010-10-01 As your financial advisors, we consider it our responsibility to understand factors that have affected, are affecting, or could affect your financial future. We also aim to educate you about such factors so that you can feel comfortable with the recommendations we make. If you ever have questions about this or any other matter, please don’t hesitate to reach out to us. We consider it an honor and a privilege to be good stewards of the assets you have entrusted to our care. Qwest Retirement can be a quick and easy financial solution. But you need to know what to look out for, and how to identify the best deals.
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