Fear Trumps Fundamentals as Stocks Turn Negative for 2010
Another wild day on Wall Street chopped an additional 140 points off the Dow as all three major averages turned negative for the year. Jittery traders, still trying to come to terms with yesterday's bizarre 1,000-point intraday plunge, continued to flee equities amid anxiety that Greece's debt woes could turn into a full-blown credit crisis on the Continent.
And yet as fear and technicals pull the market down from its recent wall of worry, near-term fundamentals appear only to be gaining steam. So brace yourselves: It's a tug of war that could make for choppy, sideways trading all summer long.
The blue-chip Dow Jones Industrial Average ($INDU) fell 140 points, or 1.3%, to close at 10,380, while the broader S&P 500 ($SPX) dropped 17, or 1.5%, to 1,111. The tech-heavy Nasdaq Composite ($COMPX) shed 54 points, or 2.3%, to settle at 2,266.
Good News Lost in the Din
Essentially lost amid Friday's market madness was a payrolls report that could have scarcely come in much better for the bulls (wherever they've gone). Employers hired staff last month at the fastest clip in four years, building on two previous months of gains. But most important was the composition of the hiring, as it came from the Holy Grail of the private sector, with significant employment gains in manufacturing, professional and business services, and in leisure and hospitality.
Friday's jobs data added significant support to the case that the economic recovery is becoming sustainable, says John Stoltzfus, market strategist at Ticonderoga Securities. That's about as strong a piece of good fundamental news as you can get and it comes amid a surprisingly strongly second-quarter earnings season: 77% of the companies having reported so far have beaten Street expectations, according to Thomson Reuters. Revenue and guidance have been encouraging, too.
Meanwhile, swooning stock prices have the S&P 500 trading at its lowest forward price/earnings multiple since -- wait for it -- March 2009, also known as the bottom of the bear market. According to estimates compiled by Bloomberg, the S&P now goes for just 13.8 times forward earnings, a 17% discount to it's 20-year average. Consider that analysts have consistently been too conservative in their estimates, and the market could very well be cheaper still.
That V-shaped recovery in corporate earnings combined with strong economic data and cheap stocks would ordinarily bode well for share prices. At some point the bargain hunters have to step in, no?
Maybe Not
Well, no, says David Rosenberg, chief economist and strategist at Gluskin Sheff. The market's been driven more by technicals than fundamentals throughout it's 13-month rally and now the same forces are at play in reverse.
"We all know that the locals who drove the market up through most of this cycle (we are talking about the hedge funds and prop desks at the major banks) are the same ones who are dispassionately heading for the exits," Rosie told clients Friday.
And just in case things weren't volatile enough this week, next week could be even worse. Starting Monday China will start to release it's own key reports for the month of April, including housing prices, new loans and inflation data. As Ticonderoga's Stoltzfus warned clients Friday: "Fasten your seat belts and make sure the shoulder straps are on right."
