What gives here, as after a historic performance in 2013 with most of the major averages closing at all-time record highs, that 2014 has gotten off to the worst start since 2009 after the S&P put in its best performance since 1997 in the year just ended? Not only that, but Monday’s downside shellacking was the worst day for stocks in four months and was the fourth-straight losing session for the Dow. This means that it has now closed lower for six out of the first eight sessions in 2014 and is at a three-week low for itself and all the major averages. In addition, 464 of the 500 members of the S&P closed lower on Monday, which was the worst such showing since last August 27.
One can point to many “explanations” for the poor market start, and one of them might be that 108 companies have made negative profit warnings so far as opposed to only 11 that have said things would be better than expectations. In addition, as opposed to 2013 which saw the largest inflow into equity mutual funds and ETFs since 2000 and an outflow from bond funds, 2014 has so far seen the opposite pattern developing, with $2 billion having been withdrawn from equity funds this month and $3 billion having been put back into bond funds.
Finally, the forward price/earnings multiple for the S&P stands at 15.4 based on an earnings projection of $118 a share for all of the companies in this index. This is higher than the multiple for the past five years, which has been around 14.1. This could mean that stocks are fully valued at current levels unless earnings come in better than expected.
The market also did not react well to last week’s release of the minutes of the December F.O.M.C. meeting, at which the Federal Reserve decided to begin tapering the $85 billion a month in bond purchase stimulus by $10 billion a month starting in January. The minutes showed that a majority of its members concluded that the “marginal efficacy of purchases was likely declining as purchases of bonds continue.” They were also concerned about the “marginal cost of additional asset purchases arising from risks to financial stability,” citing the potential for “excessive risk-taking in the financial sector.” Finally, they expressed concern about an “unintended tightening of financial conditions if a reduction in the pace of asset purchases was misinterpreted as signaling that the committee was likely to withdraw policy accommodation more quickly than had been anticipated.” Because of this, they concluded that they should proceed “cautiously in taking their first action and should indicate that further reductions would be undertaken in measured steps.”
Then came the fiasco of last Friday’s December jobs report, which made those whose expertise it is to predict the number look foolish, as the A.D.P. payroll-processing company, which puts out its own estimate on the Wednesday before the report, decided that the number of new jobs created would be 238,000. This caused analysts in the financial community to push their estimates from what had been 195,000 before the A.D.P. number up to 205,000 for no other reason than that A.D.P. had raised theirs.
And sure enough, the number from the Labor Department was completely at odds with what the experts had predicted, as it showed that only 74,000 new positions had been created last month. This was the smallest increase since January 2011.
The unemployment rate declined to 6.7 percent, which was the lowest since October 2008 and was primarily a reflection of 273,000 people leaving the labor force and who are therefore not counted in the calculation. This was the largest such shrinkage since 1977. In addition, the labor force participation rate, which means the proportion of working-age people who have a job or who are looking for one fell to 62.8 percent, the lowest since 1978. These numbers accounted for two-thirds of the drop in the unemployment rate.
On the other hand, the November figure was revised upward by 38,000 to 241,000, and if one wants to take an optimistic position on this report, one could argue that the low number was primarily a function of the horrible weather that affected large parts of the country last month, as construction jobs fell for the first time since May with a net decline of 36,000.
Manufacturing rose by 9,000, its fifth-straight month of gains, but down from the prior month’s 31,000.
And how about this statistic, for those who think that this low number was sort of ridiculous on the downside, and it is that in the past three years, there have been six jobs reports that were first reported as being under 100,000 and five of those six reports were revised back upward to over 100,000 in the next two months. It will be interesting to see if history is going to repeat itself one more time.
As stocks have adjusted lower, the bond market has re-priced itself for perhaps a slowing economy in light of the weak jobs report and the widespread feeling that retail sales are going to be reported lower as well. As a result, the yield on the 10-year Treasury note, which had reached its highest level since July 2011 at over 3 percent, is back down to 2.83 percent, a three-week low.
The main near-term focus for the market will be the fourth-quarter earnings reporting period, and the results are expected to show a gain of 4.9 percent with revenues ahead by 1.8 percent and so far there have been many companies that have come up short, and this list primarily includes retailers such as BBBY, BONT, FDO, LULU, PIR and SHLD, among others. On the other hand, M, the largest retailer of all, did well after its numbers, as did ANF and GPS. Technology giant MU also did well, so investors have to keep an open mind about the quarter’s earnings until the entirety of them have been reported.
In the meantime, the current market selloff might be a good time for people who were reluctant to chase stocks as they were constantly moving to the upside in 2013 to use the current weakness as an opportunity to enter into new positions in good companies that get excessively beaten to the downside and therefore offer attractive entry points.
Donald Selkin is the Chief Market Strategist at National Securities in New York, a veteran in the securities industry for 36 years who is widely quoted in the financial media.
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