The Dow Bounces Back

Yesterday marked the second-largest points and percentage drop of 2012 for the Dow Jones Industrial Average (INDEX: ^DJI) . After two straight days of decline, investors might be wondering whether the market can maintain its momentum. After all, the Dow is already up more than 7% this year, matching its average annual return over the past 17 years!

Should investors be scrambling for the exits? Not so fast. Let's break down the news that's driving the Dow today, and look ahead to more important data that could boost the economy tomorrow.

Spain: The new Greece?
The Dow woke up on the wrong side of the bed this morning when weak European economic data sparked a sell-off of U.S. stock futures. Germany, in particular, released news on its industrial production that failed to impress, and Spain seems to have stolen Greece's thunder to become the hot spot of the European crisis due to rising bond yields on government debt. Nevertheless, European indexes, including the FTSE 100 (INDEX: ^FTSE) and the STOXX 50 (Index: ^STOXX50E) are trending toward positive territory as the trading day comes to a close across the pond.

What does this imply for the Dow and S&P 500 (INDEX: ^GSPC) ? While the European markets can weigh on American stocks, the more important news relates to our own economic situation. For now, it's all about unemployment data.

Jobless claims: Should we rejoice?
The most important news today revolves around the Labor Department's data on unemployment benefits, which fell by 6,000 to 357,000 total claims, the lowest level since April 2008. The sharp drop in recent months reinforces the idea that we could be experiencing a lasting, sustainable recovery. While the stock markets have seen a significant run-up in recent months, America's economic growth, as measured by GDP, has not experienced the same catalyst. However, with jobless claims dropping, all eyes will be focused on tomorrow's big news: an update on the unemployment rate. While many predict it will remain unchanged at 8.3%, a rosier outlook could cause the markets to pop when trading resumes Monday morning.

Alcoa (NYS: AA) , one of the world's largest aluminum producers, could also set the tone for the market next week when it kicks off the Dow's earnings season with an announcement on April 10.

Foolish takeaway
Despite opening lower, the Dow's recovering nicely this morning, rebounding from two straight negative sessions. The news from Europe seems to be factored into a lot of economic forecasts since the region's struggles are nothing new. For investors, an update on key economic indicators is useful, but not nearly as critical as the valuations on the stocks you're interested in. If you're looking for undervalued stocks, I highly recommend starting with the three companies outlined in this report: "3 Stocks That Will Help You Retire Rich." It's our best analyst research made available free for a limited time -- download your copy now.

At the time this article was published Isaac Pino owns no shares in any of the companies mentioned in this article. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

From Our Partners