Rally softens, but that might be healthy

A Spring Swoon?

by Kenneth Leach, Steve Selengut, Matthew Melendy & Amie Snyder

LMK Wealth management

Markets pulled back last week as investors reacted to several disappointing economic reports and expressed concern that a spring swoon is around the corner. For the week, the S&P 500 lost 1.0%, the Dow trimmed 0.1%, and the Nasdaq fell 1.9%.

The big news last week was Friday’s job report, which showed a drop in the overall unemployment rate from 7.7% in February to 7.6% in March. However, much of the drop can be attributed to discouraged job seekers who stopped looking for work rather than organic job creation. Unfortunately, the economy only added a disappointing 88,000 new jobs in March, about half the number economists were expecting. Earlier in the week, payroll processor ADP released a report showing that private employers added just 158,000 jobs in March, missing expectations of 200,000 new jobs. Despite the poor data, it’s usually unwise to read too much into a single report, since monthly job data is notoriously volatile.

Entitlements on the chopping block?

In Washington, President Obama announced his intention to offer cuts to Social Security benefits and other government programs as a concession to Congressional Republicans, though no plan is final. While the White House’s proposal could help to cut the federal deficit by $1.8 trillion over the next decade, it definitely has some drawbacks.

All political affiliations aside, cuts to any programs are bound to be painful, but may also be necessary to get U.S. spending back on track. All this back-and-forth we are seeing is a sobering reminder of how much work still needs to be done to get the nation’s fiscal house in order; there is still a long road ahead.

Looking forward, investors will be watching first quarter earnings reports (which will start trickling in this week) and economic data to get a sense of how the economy is doing. Should initial earnings reports show weakness, stocks could experience further downside, though short-term consolidations are a common occurrence of healthy markets, and should not be viewed as a cause for alarm.

ECONOMIC CALENDAR

  • Wednesday: EIA Petroleum Status Report, FOMC Minutes, Treasury Budget
  • Thursday: Jobless Claims, Import and Export Prices
  • Friday: Producer Price Index, Retail Sales, Consumer Sentiment, Business Inventories
Looking forward, investors will be watching first quarter earnings reports (which will start trickling in this week) and economic data to get a sense of how the economy is doing. Should initial earnings reports show weakness, stocks could experience further downside, though short-term consolidations are a common occurrence of healthy markets, and should not be viewed as a cause for alarm

 

Performance

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov. International performance is represented by the MSCI EAFE Index. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

Headlines

  • IRS audits of wealthy taxpayers targets 1 in 8 high earners. New data from the IRS shows that taxpayers with taxable incomes of $1 million or more were audited 12 times more than the total population. These audits are proving lucrative for the IRS, netting an average of $117,000 per return.
  • Portuguese court rejects some austerity measures, upholds others. In a blow to government finances, Portugal’s highest constitutional court rejected cuts in pension benefits and reductions in leave, but upheld other measures. The ruling will likely reduce the cash-strapped government’s revenues by as much as $1.17 billion.
  • Approximately 15% of the U.S. receives food stamps. Food stamp use grew 1.8% since January 2012, showing that one of the country’s largest social welfare programs is still growing. Though annual growth is increasing, the pace of growth is slowing as the economy improves.
  • Bank of Japan doubles down on bonds. In an effort to shake off nearly two decades of deflation, the Bank of Japan will begin a new quantitative easing program, purchasing 6.2 trillion yen in April and a further 7.5 trillion yen in six future installments (total of approximately $1.4 trillion.) While this may help boost economic growth, it will add to Japan’s already unsustainable public debt load.