A sanguine Monday and Tuesday were followed by a ‘run for the hills’ mentality mid-week as fears — never that far below the surface — bubbled up to send stocks down and the U.S. dollar up in a flight to safety. All equity indexes followed here swooned on the week except the S&P/TSX Composite and the Bolsa. Losses ranged from 0.3 percent for the Nasdaq to 5.5 percent for the Taiex. But all indexes are below year end levels. The primary reasons for the declines last week are two —
- The growing worries about the fiscal health of Europe’s weakest economies triggered a worldwide flight to the safety of the U.S. dollar and Treasuries. Confidence waned in European governments’ ability to repay their debts, a combination of fears over Greece, a troubled auction of Portugal’s debt and mounting fears that Spain’s much bigger economy appears to be in deeper trouble than either Greece’s or Portugal’s. In a relatively short time span, investor fears which had been limited to Greece have now spread elsewhere and to equity markets.
- The impact of declining sentiment in Europe was compounded in the U.S. by poor employment data, with the number of American workers claiming jobless benefits rising unexpectedly last week. The data are noisy and may be affected by the bad winter weather. But there were 6 percent more new claims last month than in December. This is a great leading indicator and it is rising again.
In the periphery, investors are restive about the end of quantitative easing programs with the UK QE program on hold and the U.S. ending its credit easing initiative soon. Investors fear that the markets will come under intense pressure without this stimulus. Markets now must learn to live without the government stimulus.
Equities dropped for the fourth consecutive week due worries over the job recovery—or lack of recovery—and risk of default in various sovereign funds in Europe. But the week actually got off to a decent start the first two days. On Monday, personal income and ISM manufacturing numbers were better than expected. However, traders apparently chose to ignore the fact that strength in personal income was from a surge in farm income—the critical wages and salaries component was sluggish. Exxon Mobil topped forecasts for the quarter and that also helped boost stocks at the start of the week. On Tuesday, equities saw an incremental rebound in pending home sales in December as a good sign for housing even though November sales had plunged. On the earnings front, UPS indicated that first quarter profits would be up slightly on a year-ago basis and News Corp. topped estimates.
The rest of the week, however, most major indexes were pulled down generally over jitters about how weak the Friday jobs report might be and over debt problems in parts of Europe. At mid-week, economic news was mixed but net negative. ADP reported a drop in 22,000 private sector jobs, coming in less negative than estimates. Outplacement firm Challenger, Gray & Christmas said that announced layoffs in January hit a five-month high in December. Finally, the ISM non-manufacturing index edged up less than hoped. Net, investors had become increasingly nervous about the jobs picture and equities declined modestly for the day.
On Thursday, their fears worsened as initial jobless claims rose moderately instead of dropping as anticipated and equity losses accelerated. Basically, traders feared the worst the next day.
Stocks swung sharply on Friday. A worse-than-expected payroll number in the January employment situation, combined with a huge downward annual revision, bumped stocks down during the day. The Dow was down by over 150 points in intraday trading but rose rapidly during the last hour of trading after consumer credit outstanding fell less than expected. This hinted at lower rates of charge-offs by banks. Also, short traders took profits, helping equities to rebound with most indexes ending the day net positive.
Throughout the week, worries over possible default by Greece, Portugal, and Spain on sovereign funds weighed on stocks. Investors feared that this foreign debt could become another sub-prime crisis as holders of these securities could find that their holdings do not have the value earlier believed. Overall, job concerns and sovereign debt woes in Europe left most equity indexes with a loss for the week.
For the year-to-date, major indexes are down as follows: the Dow, down 4.0 percent; the S&P 500, down 4.4 percent; the Nasdaq, down 5.6 percent; and the Russell 2000, down 5.2 percent.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.