Just like that, the “risk-on” trade was off last week, and stock prices fell more than 2%. Sentiment was decidedly more downbeat than might be expected in a week that saw the Dow industrials briefly touch their highest point since late 2007.
In a stark reversal of the previous week’s festivities, big stocks outperformed small-caps, as investors fled risk. Concern about continued mixed U.S. economic news—particularly Friday’s jobs data—gained the upper hand. Worry about the Sunday, May 6, elections in France and Greece also had some investors on edge.
The Dow closed Friday at 13,038.27, down 1.4%, or 190 points, for the week. On Tuesday, the index had reached 13,279.32, its high since Dec. 10, 2007. The Nasdaq gave up 113 points, or 3.7%, to 2956.34. The Russell 2000 small-cap index slid 4%, to 791.84.
Investors are worried that the deteriorating trend in economic data portends a sustained slowdown, says Steve Einhorn, vice chairman at Omega Advisors. For the most part, the market had been resilient until Friday, when it was “unable to swallow” the jobs numbers, he adds.
The Labor Department said April payrolls rose 115,000, some 45,000 fewer than expected. April was the third consecutive tepid month. Though the unemployment rate dropped to 8.1% from 8.2%, it was due partly to people dropping out of the workforce.
It’s no coincidence that the rally that began Oct. 4 has been confined over the past two months to a tight S&P 500 index range of 1350 to 1400. It’s constrained on the one hand by that string of continually bland economic reports, particularly on jobs, but supported on the other by strong corporate profits.
Einhorn argues the market is wrongly interpreting the data as a sustained slowdown. Instead, he says, the less strong numbers are a consolidation after much higher-than-expected improvements last winter, caused in part by much warmer weather.
Even so, investors don’t like the idea of consolidation as much as they do expansion. Steadily improving jobs data would be a recipe for the resumption of stock gains.
The European elections seem far away, yet they can still cause market mayhem. Jeffery Saut, chief investment strategist for Raymond James, says that if Sunday’s votes and others that follow in June give markets the idea that agreed-to sovereign-debt deals might be watered down, then it could be a long hot summer.
Longer term, stock investment continues to be warped by the Fed’s low interest-rate policies. Nicolas Colas of ConvergEx points out in a recent report that a $1 million investment in three-month Treasuries returns just $200 (Source: Barrons Online).