Photo courtesy of REUTERS
IF THE PAST SIX WEEKS ARE ANY indication, the stock market could be hemmed in a nervous trading range this summer.
Marking the upper border of that range is the Standard & Poor’s 500 index’s late-April peak of 1217. This high-water mark, however, is rapidly receding from view as traders cut their expectations for U.S. economic growth below the average 3.6% pace it clocked since last summer. The latest blow was dealt Friday, when the government reported 431,000 jobs created in May, almost all due to temporary census hiring, while the private sector added only 41,000 workers. Are prospective employers becoming unnerved by Europe’s debt crisis and the market’s unfolding correction?
Friday’s 3.4% selloff marked the worst one-day reaction to a jobs report in at least a dozen years, and it hurtled the S&P 500 toward the lower end of its 2010 range — the 1041 threshold that had lured bargain hunters in early February and again in late May.
There are encouraging signs the market is groping for stability after the worst May in a half century. BP’s American depositary shares (ticker: BP) managed their first back-to-back gains since the April 20 rig explosion wiped nearly $60 billion off the company’s market value. Europe, the epicenter of the market’s woes, saw its pan-European stock benchmark inch up 0.2% last week for its third gain in four weeks.
Investors have also reacted quickly, and resolutely, at the first whiff of trouble. By the end of May, they had yanked nearly $30 billion from stock mutual funds — a one-month flight from risk that surpassed the $25 billion withdrawn in February 2009, or the $26 billion pulled in March 2009. That was just before this bull run began and when the economic outlook was far grimmer.
Still, last week’s tally was ugly. Copper prices, that barometer of global construction zeal, tumbled 9% to a fresh 2010 low. Blue-chip stocks outperformed their smaller peers, but neither were spared. With money managers bound for the beach and their deputies erring on the side of caution, the Dow Jones Industrial Average lost $106 billion of its market value on Friday alone. It ended the week down 205, or 2%, to 9932. The S&P 500 absorbed its fourth loss in six weeks. It has fallen 12.5% since late-April and is just a hair above its 2010 low. The Nasdaq Composite Index slipped 38, or 1.7%, to 2219, while the Russell 2000 gave up 28, or 4.2%, to 634.
In the coming weeks, demand from Europe will start to wane as governments in Germany, the U.K., Spain and Italy tighten their belts. The euro skidded to a four-year low below US$1.20 Friday, dimming the glow of American exports. U.S. states are trimming budgets and raising taxes. A messy oil spill crimps the Gulf Coast, a ban on offshore drilling thwarts some energy companies, and the threat of financial regulation hangs over Wall Street.
One Wall Street strategist thinks the market has just begun the process of lowering profit projections, and advocates a less economically sensitive and more defensive stock portfolio. He thinks a 1050 to 1150 range represents “fair value” for the S&P 500 at the end of this year. But with the S&P 500 trading near 13 times projected 2010 profits, “further downside to prices could be fairly limited,” even if the index’s profit estimates are cut $3 or $4. In other words, the 1000 threshold for the S&P 500 “represents good value and could be an attractive entry point.”
All this assumes, of course, that our economy merely slows but does not start to stall, and here there are reasons to be hopeful. Among other things, southern Europe’s fiscal chaos is “an aftershock of the global financial crisis and not a sign of a new crisis developing,” argued a chief market strategist, recently. Already, “expectations for the euro zone are low and do not need to be cut drastically.” The ratio of debt to gross domestic product for countries like Greece is staggering, at about 1-to-1, but still far less leveraged than comparable ratios pushing 40-to-1 for the likes of Lehman Brothers and Bear Stearns (Source: Barrons Online).