Volatility came roaring back into the market this week, with fresh concern in the Euro zone and weak economic data out of China giving the bears a reason to growl. For the week, the Dow Jones fell 1.6%, the S&P dropped 2% and the Nasdaq lagged with a 2.3% loss. The daily action was bumpy too, with the S&P moving more than 1% in 4 of 5 sessions and posting its worst single-day loss since November.
There are a few very key issues driving sentiment right now.
Euro Zone is Back-Bigger and Badder than Ever!
The first is a fresh burst of weakness out of the Euro zone. Pulling Greece together was supposed to make everyone feel warm and fuzzy. But don’t look now, here comes Spain, Italy and Portugal. It’s pretty simple. Unsuitable spending and credit expansion lead to higher interest rates and insolvency. Let me just say this. The action is going to get very hot in the Euro zone over the summer so be prepared for a bumpy ride.
Jobs Disappoint
The second is the weak jobs report from last week. That was a real sentiment killer. We had seen pretty solid jobs growth over the last few months, creating optimism that the “great American jobs machine” would start to accelerate. But as it turns out, a lot of that is looking cyclical and transitory, with the warm weather and early-year hiring proving temporary drivers.
The jobs conversation is profoundly important to consumer spending, which has been pretty solid over the last few months. But with spending and credit expansion trending ahead of income gains, that also looks unsustainable. And if gas prices keep going higher into summer, go ahead and slap a big tax on everyone that will surely put a dent in consumer spending.
Jobs and the Euro zone story are leading the short-term pack right now, but longer term, there are other issues the market is dealing with.
China GDP Miss
China is also in play, continuing along its trend of a cooling economy with disappointing Q1 GDP numbers. The country is also dealing with political issues, with Bo getting tossed. China is doing everything it can to hold it together right now, but there whole system is built on a deck of cards so all bets are on.
Debt Ceiling
Domestically we’ve got our own spending problems. The Federal government is set to breach the debt limit again in September. So like we saw last year it should be another fun season of watching politicians duke it out as the ratings agencies observe from the sidelines and prepare to ding our credit or outlook.
The Fed
And as important as anything, you’ve got the Fed. The most powerful central bank in the world has been playing coy lately. It’s acting shy, saying it doesn’t see the need for more monetary stimulation. The market has not liked that one bit. It’s definitely taken some spring out of the market’s step. But bigger picture, the general consensus is that if the market or economy needs it, the Fed will be there to support.
So that’s a quick rundown of what the market is looking at right now. Sentiment has been remarkably resilient this year, which is what has driven the market’s very strong performance. But a lot of that underlying bearishness seems to be blossoming as some of these longer-term, big-pictures issues evolve. And as we head into a seasonally weak time of the year for stocks, investors are finding more reasons to be bearish.
Updates:
Investors turned to gold this week as a bastion of safety in the weak market, pushing Double Gold (DGP) to a 3.18% gain. The Junior Gold Miners (GDXJ) we’re also up, gaining 2.58%. Gold holding in higher territory says a lot about the market’s view on the Fed. Everyone knows if the Fed has to move gold is going higher, so the longer-term players are using this dip as a chance to buy ahead of the crowd rushing in on “breaking news” that the Fed will stimulate.
VeriFone Systems (PAY) was also strong, posting an outsized 2.76% gain. VeriFone does look a little pricier right here after some very big gains over the last 6 months. But as a very solid mid cap in a growth industry, investors seem willing to pay up to get it.
But overall, we saw more red than green in the weak market.
CPFL Energia (CPL), a Brazilian electric utility with a hefty dividend, took a beating, falling an outsized 8.32%. Emerging market stocks are usually pretty good indicator of investors appetite for risk. So a big outflow in a solid emerging market stock like CPL is an indicator that investors are shifting into more conservative segments of the market right now. Longer-term, emerging markets are a place to look for outsized gains relative to developed economies, but you have to be willing to live with the volatility.
Cimarex Energy (XEC) was also red, falling 4% on the week. Much like emerging market stocks, energy stocks are volatile in a weak market. But longer-term, with crude prices on the rise, energy stocks are a way to capitalize on the trend.
And finally, even the mighty stumble sometimes, with Apple, Inc. (AAPL) posting a rare weekly loss and 4% decline. Apple has seen huge gains over the last few months, so it makes sense that a lot of bigger players would want to take some profit here at the all-time high ahead of summer.
That’s all for this week. Until next time, here is a good article discussing converting an IRA to a Roth IRA. Enjoy!
Should You Convert Your IRA to a Roth?
Your Investment Partner,
Mike
