Stocks close out sweet third quarter on sour note

 

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NEW YORK -- Stocks closed out a profitable third quarter on a slightly down note Friday, with a weak reading on manufacturing in the Chicago area reinforcing fears that the economy is slowing and pushing stock prices modestly lower.

All three major stock indexes rebounded from losses in the second-quarter by posting quarterly gains ranging from 4% to 6%.

It was the best quarterly performance for the Dow Jones industrial average, the Standard & Poor's 500 and the Nasdaq composite since the first quarter of 2012.

Story: Stocks close down on last day of third quarter

The July-through-September quarter closed its books Friday as the Dow tumbled 49 points to 13,437 to trim its gains for the quarter to 4.3%. The profits were driven largely by new and aggressive stimulus measures announced by central bankers in the USA and Europe.

"The third-quarter story was really simple," says Rex Macey, chief investment officer at Wilmington Trust. "The performance was propelled by the generosity of global central bankers."

In September, the Ben Bernanke-led Federal Reserve, of course, moved markets when it announced a third round of bond buying, known as quantitative easing, or QE3, to boost the economy and jobs market.

A week earlier, the European Central Bank also said it would purchase government bonds in the eurozone in an effort to keep borrowing costs low in indebted countries like Spain and Italy and reduce financial stress in the system.

And while the new promises of stimulus from bankers won't translate into peppier economic growth anytime soon, it did reduce fears of a worst-case scenario playing out in global markets, Macey adds.

"A risk of a big downside," says Macey, "has been taken off the table."

Fears of financial Armageddon in Europe lessened further Friday when a stress test of Spain's banks done by an independent auditor showed the banks need a less-than-expected 59.3 billion euros ($76.3 billion) to firm up their finances.

For the quarter, the Nasdaq rallied for a gain of 6.2%, the S&P 500 jumped 5.8%, and the Dow rose 4%-plus. Those three major stock indexes will head into the first day of trading of the fourth quarter on Monday with year-to-date gains of 19.6%, 14.6% and 10%, respectively.

Even though the fourth quarter has been the best-performing quarter for the Dow in the past 20, 50 and 100 years, according to Bespoke Investment Group, the final three months of the year are likely to be filled with a fair share of volatility and anxiety, says Frank Fantozzi, CEO of Planned Financial Services, an independent wealth management firm based in Cleveland.

Investors should expect some of the tailwinds from the Fed's QE3 announcement to start to fade, Fantozzi says.

Wall Street will also have to grapple with recent signs that show the economy is decelerating, he adds. On Thursday, the government revised growth in the April-through-June quarter down to 1.3% from 1.7%. Weak readings out this week on Chicago manufacturing and orders for durable goods, such as dishwashers and ovens, added to the economic worries.