Weekly Update – May 7, 2012
Last week was a rough one for U.S. stocks. The markets started off the week positive, pushed upward by positive corporate earnings, but retreated the last three days to close at a low point, hammered by a disappointing jobs report and renewed fears about a stuttering economic recovery. The S&P lost 2.44% – its worst weekly performance this year, while the Dow lost 1.44% and the Nasdaq fell 3.68%.[i]
The week’s sell off began on Wednesday when the latest ADP Employment Report – usually released before the official Labor Department report – suggested that employment had improved by less than expected. The news was confirmed on Friday when the official numbers showed that employers had added
just 115,000 jobs in April, falling well short of the expected 170,000 new jobs. Although the unemployment rate dropped to 8.1%, we can’t get excited about it because the fall is primarily due to job-seekers giving up their job search. If we see continued slowness in the job market, it is possible that the Federal Reserve will step up efforts to boost the economy again. Since inflation is still well below the danger zone, the Fed still has room to take action.
Solid corporate earnings have provided a breath of fresh air, showing that business is still humming along. First-quarter earnings among companies in the S&P 500 are currently at 7.8%, well ahead of expectations. However, companies are forecasting a much slower second quarter, a sign that executives are bracing for declining sales.[ii] Analysts believe that a warm March and an early Easter may have shifted sales to March, cutting into second quarter revenues. Please also keep in mind that companies often sandbag their forecasts in order to artificially beat expectations when the official earnings are posted.
Last week’s poor market performance and disappointing jobs report reminds us that our economy and investors nerves are still “recovering.” Just as an injured person who undergoes a major surgery will have good days and bad days while recovering, so our healing economy will experience ups and downs.