Equities fell more than 1% as the major indexes sold off in the latter half of the week. Tech stocks took the brunt of the damage. Several factors combined to disappoint investors, including weak U.S. economic data, a continuation of lousy first-quarter earnings from tech companies, and a Bank of Japan decision not to introduce new stimulus.
Tech stocks, which lost 3.6% last week, were particularly battered by fallout from Apple ’s first quarterly sales drop in 13 years. Apple shares declined 11% to $93.74. First-quarter U.S. gross domestic product, out Thursday, wasn’t encouraging, either, with GDP expansion a sluggish 0.5% in the period, weaker than forecast – see additional information in the “Heads Up” section.
Investors were treated to the relatively unusual phenomenon of Europe growing faster than the U.S. Euro-zone first-quarter GDP rose 0.6%, a blistering rate by Continental standards, and higher than expected. That relative disparity drove the U.S. dollar down some more.
For the past 18 months, investors have bemoaned the extraordinarily strong greenback, which depresses overseas sales at U.S. multinationals. Last week, however, greenback weakness became an issue. To the extent that it indicates that U.S. expansion is slow compared to the rest of the world, investors don’t like it.
Last week, the Dow Jones Industrial Average lost 230 points to 17,773.64 or 1.3%. The S&P 500 index fell 26 to 2065.30. Tech stock weakness again hit the Nasdaq, which fell 2.7% to 4775.36.
A whiff of global growth fears returned on the dollar woes, says John Canally, an investment strategist. The concern that central banks are “out of bullets” also hasn’t gone away, he says. Unlike in the January-February market downdraft, however, commodity prices, oil especially, are being supported by the lower dollar.
Outside the tech sector, reactions to earnings were relatively muted, adds Edward Perkin, chief investment officer at Eaton Vance Management. In tech, the stocks that are being punished the most are the “heavily owned issues,” like Apple and Alphabet (GOOGL), where “good earnings numbers weren’t good enough,” if they fail to meet expectations.
Though the energy sector should be less of a drag on earnings in the future, says Joseph Amato, chief investment officer of Neuberger Berman, “…I wouldn’t chase the market at these levels until there’s greater clarity on earnings.”
Since last summer, the market has attempted two major rallies that have failed to surpass all-time highs set in May 2015. This latest one has seen some strong breadth. Even so, “the momentum just isn’t there,” says Perkin, and we agree.
The second-longest bull market in history is stalled, waiting for a catalyst, and that will be earnings growth. If the market is convinced profits will expand, it’s party on. Without it, chances are the S&P 500 index will continue to shilly-shally roughly between 2000 and 2100.
(Source: Barrons Online)