Markets can remain irrational longer than you can remain solvent. – John Maynard Keynes
What looked like a positive week for the stock market came to screeching halt on Friday as the major averages all suffered steep losses. Stocks were poised to finish higher for the second consecutive week but rising tensions between the Ukrainian government and pro-Russia militants caused investors to become risk adverse and lighten up on their equity holdings. With fears that the conflict may escalate, investors wanted no part of being long heading into the weekend. This was despite the fact that both earnings and economic data last week continued to be fairly positive. Although Amazon.com reported disappointing earnings on Friday, first quarter corporate earnings reports continued to be a pleasant surprise and better than expectations. The index of leading economic indicators increased more than expected and portends faster growth for the rest of the spring and summer. While the housing data released last week was somewhat disappointing, there are signs that new and existing home sales are set to improve. Couple this with strong durable goods orders for March and improving monthly jobless claims, and it was no wonder that the stock market was higher at Thursday’s close. But as the S&P 500 neared the 1880 or 1890 level, as it did on Thursday and several times earlier in the month, there seems to be resistance and unwillingness on the part of investors to buy stocks at these levels. The market may be range-bound for the foreseeable future until a meaningful catalyst emerges that enables it to break through to higher levels.
The week started off on a good note as the index of leading economic indicators increased 0.8% in March, the best level since November. Similarly, of 72 economists polled in a survey, none expects the U.S. economy to contract in 2014 and most see economic growth between 2.1% and 3.0%. The reasons behind weaker than expected new and existing home sales last week have been higher mortgage rates and home prices as well as fewer properties on the market. The harsh winter weather may also be partly to blame but that should change as temperatures rise.
U.S. consumer sentiment in April rose to its highest level in nine months and is a reflection of consumer’s current financial situation, helped by a strong stock market, and a renewed optimism about the outlook for the economy. Apple beat both sales and earnings estimates for the first quarter, raised its stock buyback and quarterly dividend and split its stock seven for one, all of which was good news for shareholders.
For the week, the Dow Jones Industrial Average edged down 0.3% to close at 16,361 while the S&P 500 Index declined about two points or just 0.1% to close at 1,863. The technology-laden Nasdaq Composite Index lost 0.5% to close at 4,075.
In addition to another full week of quarterly earnings reports, there will be a lot of potentially market-moving news. The Federal Reserve Open Market Committee (FOMC) meets to review and discuss monetary policy and is widely expected to reduce its monthly stimulus by $10 billion from its current $55 billion. The Fed will also probably issue a statement that interest rates will stay low for a considerable time as the economy recovers and inflation remains below its target.
The April employment report will be released on Friday and is expected to show an increase of about 210,000 new jobs with the unemployment rate unchanged at 6.7%. This jobs number would be indicative of an improving labor market and bodes well for stronger growth. First quarter GDP growth is expected to have increased at an annual rate of just 1.1% as severe winter weather took its toll on total output.
Among the heavyweights scheduled to report earnings this week include Merck and Bristol-Myers Squibb in the health care sector, eBay and Automatic Data Processing in the technology sector, Archer Daniels Midland and Kraft Foods in the consumer non-durables sector and Exxon Mobil and Chevron in the energy sector.
As we near the end of April and approach the beginning of May, that old adage “sell in May and go away” comes to mind, especially in light of much uncertainty with regard to the strength of the economy, earnings guidance from corporations and geopolitical risk in Ukraine. This week’s economic calendar, which includes the Fed meeting, the employment report and first quarter GDP growth, only adds to the uncertainty over the future direction of the stock market. For some reason, the six-month period from May through October has a reputation for being a poor one for the stock market. While September is the worst month for stock performance, it is the month of October that has proved to be the scariest. Of the ten largest percentage daily losses for the Dow Jones Industrial Average, five have occurred in October, the most recent being in 1987 and 2008. However, last year during this six-moth stretch, the market was up 10%. And research shows that the stock market has been positive nearly 70% percent of the time since 1950 during this period. With signs that the economy is improving and corporate earnings expected to follow suit, the best strategy is to stay the course with an investment objective and asset allocation that matches your risk tolerance and time horizon.