Once Again, Dow and S&P Reach Record Highs Before Selling Off

Similar to the pattern of recent weeks, the Dow and the S&P continued to make new highs but then backed off from those highs before beginning another assault on the records. And this past week was no exception, as after attaining their best-ever levels last Thursday, the major averages ended the week with nominal losses last Friday and extremely significant losses on Monday. So now the question becomes, is another assault on those recent record highs in the offing?

The market was motivated to the upside in the middle of last week as a result of comments made during the F.O.M.C. meeting last month, in which Federal Reserve officials seemed to be on course to end their extraordinary bond buying stimulus program. But let it be remembered that this meeting took place before the very weak March jobs report issued two weeks ago.

There was extreme dissension among members of the committee, as a few expected the pace of asset purchases to be lowered by mid-year and then to end them later this year while others wanted to end the buying at year’s end. But for the time being, the Fed decided to continue with its QE3 quantitative easing program, the third such attempt to increase economic growth in the wake of the financial meltdown of a few years ago.

The Fed has tied the extent of its bond buying to a “substantial improvement” in the labor market and intends to keep interest rates close to zero until the unemployment rate declines to around 6.5 percent. Since the latest jobs report sort of upended hopes that the labor market was in fact improving, investors decided that the easing programs will continue without an end for this year at least, which was the primary reason to push both the Dow and S&P to new all-time highs, as the former reached 14,865 and the latter advanced to 1593 last Thursday, both just short of the next round numbers, so to speak.

Both of these averages attained these aforementioned best-ever levels as weekly jobless claims fell by the most since July 2008 with a 42,000 decline down to 346,000. But this report unfortunately marked the end of the recent series of releases that showed ongoing improvement in the economy as last Friday saw a decline in March retail sales, the lowest reading for the March P.P.I. report with a decline of 0.6 percent due to lower food and energy prices, the lowest reading for the U. of Michigan Consumer Sentiment Survey in nine months and the smallest rise in February business inventories since last June. The latter report could be interpreted as a sign that companies expect lower spending from both consumers and businesses.

On Monday, the bad news continued as it was reported that China’s economy grew by “only” 7.7 percent in the first quarter, less than the forecast for an 8 percent expansion and disappointing investors who had hoped the second-largest economy in the world would rebound after producing its weakest growth rate in 13 years in 2012. This lower forecast came about because of slower than expected increases in their industrial production and fixed-asset investment.

What was even more dramatic than the largest point decline in the Dow since last November 7, a 265 point shellacking, the worst loss for the S&P since November 9, 2011, the poorest showing for the Nasdaq since last June and the weakest performance from the Russell 2000 Index of small stocks in 17 months, was the complete collapse of most commodities, particularly gold.

The precious metal underwent its worst two-day decline in 30 years as the CRB Index (the most widely watched basket of commodity prices) fell to its sharpest one-day loss since last September and reached its lowest level since last June. This price collapse was the result of growing caution that the world economy was headed for another slowdown as China is the world’s largest consumer of commodities. Industrial metals got caught up in the selloff with silver declining by 10 percent and copper reached its lowest price in more than a year. Gold fell to $1,350 an ounce, its lowest in two years, the result of a potential sale of gold holdings from Cyprus in order to raise money to meet the terms of their bailout agreement and as a result of investors in exchange-traded gold funds running for the exits.

Perhaps the best thing to come out of this selloff is that energy prices have declined to their lowest levels of the year as even before the latest Chinese data, the International Energy Agency and even the Organization of Petroleum Exporting Countries (O.P.E.C.) had already lowered their global oil demand growth for 2013, and crude oil inventories in the U.S. are at their highest level in 22 years.

There is also the concern mentioned earlier that the Federal Reserve may end its bond-buying binge sooner rather than later and that stimulus has supported commodity and stock prices for more than four years now.

The extremely sharp market decline to start the week raises the question of how the stock market relates to the overall economy, as there does seem to be some disconnect. For instance, the outlook among small business owners remains stuck near recession levels while the 100 largest S&P companies are expected to see profits rise by 6.6 percent this quarter. Of all the profits earned by S&P companies, 22 percent will come from the 10 largest ones.

This is because large companies have easier access to credit while the current fiscal tightening in Washington, D.C. in the form of budget cuts at various government agencies and the increase in social security taxes will be felt by individuals. Let it also be remembered that the largest S&P companies earn a substantial portion of their revenue overseas and part of their profits has been the result of cost-cutting by laying off workers.

With the spate of recent weaker economic reports this month, starting with the March non-farm payroll number which saw the creation of less than half of the 200,000 jobs that the economy had produced since last November and the slew of weaker reports this past week as mentioned above, many have questioned why various stock market averages attained the record-high levels that they did. The answer might be that investors are projecting better economic growth starting in the final quarter of 2013.

This article appeared in print on page D41 of the April 17th, 2013 edition of Hamodia.