[dropcap]S[/dropcap]tocks fell a second consecutive week for the first time in 2012. Concerns about Spanish debt, a slowdown in China and a bumpy U.S. jobs recovery all contributed to selling pressure. Earnings season got off to a strong start. Alcoa, Wells Fargo, Google and JP Morgan all topped estimates, but it did little to boost sentiment. Treasuries and Gold gained.
S&P 500: 1,370 (-2.0%)
MSCI EAFE: -1.3%
US 10 Year Treasury Yield: 1.99% (-0.18%)
Gold: $1,656 (+1.5%)
USD/EUR: $1.308 (+0.1%)
- Monday – The U.S. unemployment rate dropped to 8.2%, but the number of nonfarm jobs created in March fell short of estimates.
- Tuesday – Spanish and Italian bonds lost value after the Spanish Economy Minister failed to rule out a bailout from greater Europe. Stocks fell.
- Tuesday – Aluminum maker Alcoa posted a surprise profit.
- Wednesday – Natural gas fell below $2 per million BTU.
- Thursday – Fed Vice Chairman Yellen and New York Fed President Dudley both made comments indicating the Fed is unlikely to raise interest rates anytime soon.
- Thursday – Google announced earnings that beat estimates along with a stock split plan that would increase voting control for management.
- Thursday – Gartner group announced global PC shipments unexpectedly grew in the first quarter.
- Friday – China reported Q1 GDP growth of 8.1%, below most estimates.
- Friday – Data showed Spanish bank borrowing from the ECB surged in March.
The S&P 500 is only down 3.5% from its peak, but it feels worse because it has been so long since any kind of prolonged decline (if you choose to count two weeks as prolonged). This feels like a normal correction. It could end soon, or it could wind up looking like a larger, more normal sized correction.
The main story in the coming weeks will be Spanish bond yields. Last year, when European sovereign debt issues flared up, the ECB was the main buyer. This seems to be the case again. Spain has 142 billion Euros of debt maturing in 2012. That’s a lot, but it is not unmanageable. Debt service payments as a percent of GDP are actually a lot lower in Spain than they were in most of the 1990s, and will continue to be so even if the country is forced to pay close to 7% for new debt (well above current levels).
Corporate earnings will not be a primary driver of stocks in the short run, but it is nice to see earnings season get off to a solid start. In the long run, stock owners will be rewarded for earnings and increased enterprise value.