After the market seemed to settle down a bit from the North Korean obsession earlier in the week, it got clocked to the downside once again on Friday as the result of a very poor March non-farm payrolls report, which came in below the lowest estimates as the numbers showed that a shockingly low number of jobs was created, the worst in nine months at only 88,000. The only silver lining behind this cloud was that the January and February totals were revised higher by 61,000, but the market wants to know – what have you done for me lately, so to speak. The unemployment rate declined down to 7.6% from 7.7% only because of the number of people who gave up looking for work and dropped out of the labor force as a result, to the tune of 496,000 people. This meant that what is known as the labor force participation rate declined to only 63.3%, one of the lowest readings in decades. Retail jobs showed the largest decline, and hello, don’t you think that this had something to do with the fact that people are spending less at these stores due to take-home pay being less because of the increase in the social security tax deduction from a person’s check and also due to the fact that gasoline prices at the pump were at their highest levels ever in February and March, for this time of the year, and for that we can thank the energy traders who maneuver this market beyond what the fundamentals would suggest. This weakness in the overall jobs total might be attributed to a word that the market had sort of forgotten about in its rush to consecutive all-time highs in many averages last month and earlier this month, and that is the word “sequestration”. This could have a negative impact as those federal spending cuts have only just started and could be a more substantial headwind for the economy in the next three months. This is because many government workers will have to take days off without pay.
As a result of this shocking report, the Dow got sold off very heavily on the opening, as it reached a 172 point loss by 10am, and then began a steady but irregular chop off of those worst levels and at 3:30pm it began an upside acceleration from 90 points lower to finally end with a closing decline of 41, which in a sense was an accomplishment considering how far down it had been early in the session.
Breadth numbers ended at a 14/15 negative ratio and once again the Nasdaq lagged badly as it finished with a closing loss of 21, which is a horrible relationship relative to where the Dow closed. This was due to weak earnings reports from FFIV and RDWR, which put the technology stocks on the defensive right off of the opening. And once again the laggards were the stock named after a fruit that for what it is worth, found support once again under 420, AMZN, GOOG, which has started to roll over from what were perhaps unsustainable levels despite analysts putting out price targets at 1000, NFLX, which also found the air a bit too thin at recent highs and PCLN. In addition, old-time has been’s such as CSCO and ORCL, which had done well from low levels, also sold off sharply.
This discrepancy between the Dow and the rest of the market means that the troops have not been marching to the upside along with the generals lately, as for instance the Russell 2000 Index of small stocks underwent its worst weekly decline since last June and the Dow Transports suffered their worst weekly showing since last September. Both of them had reached all-time record highs last month. The S&P underwent its largest decline of the year last week as well after reaching an all-time closing high last Tuesday at 1570.
And as a further example of the Dow sort of being in its own upside world, for the week, it declined by “only” a total of 13 points for the week, while the S&P was lower by 16 and the Nasdaq ended 63 points lower. This is because of the makeup of the Dow, which has benefitted this year from good showings in more defensive types of stocks such as the healthcare, telecom and utilities groups, which of course we have been advocating for the longest time. The S&P underwent its largest decline of the year last week as well.
The VIX had an upside field-day at the start, as it rose by exactly the amount it should have relative to the worst Dow showing as mentioned above, with a 1.76 point gain before finally cooling down by the close and ended only .02 higher to 13.92. The big news was the fact that bond yields came down sharply on the perception of a slower economic rebound which means that the Fed is not going to be ending its stimulus programs anytime soon and that rates will continue to stay at very low levels, and the 10-year dutifully declined to a 1.71% yield after getting down as low as 1.67% when stocks got sold off sharply on the opening. These yields are the lowest this year. And even crude oil had the nerve to decline again, down to around $93 a barrel after reaching as low as $92. On the other hand, the Euro continued its rally off of support below 1.2800 and got as high as 1.3000 on the perception that interest rates are going to stay low in the U.S. and even gold, which was written about as having fallen close to a bear market with an almost 20% decline this year, also made a nice rally off of what has been very good support so far below the $1,550 an ounce level.
Finally, the S&P continued its record streak of doing the opposite of what it had done the day before for the 13th straight session since March 19th, at which time it went from 1548 to 1553. Unless we get a strong rally this afternoon, it would appear that today’s lower market is going to put an end to that streak.
The market is sort of drifting lower with little upside motivation ahead of the official start to the first-quarter earnings season today, with Dow lightweight AA reporting after the close. Why anyone pays attention to a stock that has lost 80% of its value in the past several years and probably should not even be in the average in the first place is beyond me. Actually the earnings calendar is on the light side this week, with another Dow component, JPM, reporting on Friday, along with another important financial, WFC. The lineup for the entire week is later in this report.
There is caution ahead of the reporting period for earnings because during the past three months there have been 86 companies issuing profit warnings as opposed to only 24 with positive guidance. This negative/positive ratio of 3.58 is the highest in the past seven years. Financials and telecom are projected to show the best earnings gains, at plus 11% and 6% respectively while energy and health care, which have done well this year, are projected to report earnings declines of 4.5% and 3.5% in that order. In fact, the Dow is being weakened today and also on Friday by lower showings in its two energy components, CVX and XOM.
Breadth numbers are even and the VIX is ahead by .04 to 13.96 while the yields on 10-year Treasuries remain unchanged at 1.71%. The Euro is just about unchanged at 1.3000 after having been higher earlier. Gold is resuming its downside ways again and crude oil is rebounding after its large selloff last week.
It would appear that with no earnings on the horizon until this evening and no economic reports until later in the week, the market will just sort of drift with a downside bias for the remainder of the session, as what is there to motivate the upside today, with investors fearing a repeat of the pattern of the past three years when after strong early gains to start the year similar to what has happened in 2013 as well, the market topped out around this time and underwent a correction going into the late spring and summer.
As mentioned earlier, earnings reporting season is upon us and the lineup begins with the ridiculous situation where AA, a stock that has lost 80% of its value in the past several years, leads off the batting order and the biggest deal will be made about a stock with an “8” in front of it only because after all, it is in the Dow. This will be followed by other companies that are not so interesting until we get a deluge of really important ones the week of April 15th, For what it is worth, we will hear from BBBY on Wednesday and JBHT, PIR and RAD on Thursday; Friday – JPM, the second Dow component to report and WFC.
Economic reports will include: Wednesday – the minutes of the last Fed meeting, always important; Thursday – weekly jobless claims; Friday – March advance retail sales, March P.P.I. and the April preliminary U. of Michigan Consumer Sentiment Survey.
First quarter earnings rose by 6.2%, increased by 5% for the second-quarter, were flat for the third-quarter and were 6.3% higher in the fourth-quarter. The current projection is now for a gain of only 1.6 % in the first-quarter of 2013, down from the original projection of 4.3% in January.
The S&P trades at 14.2 times the projected 2013 earnings of $111. Earnings were $85 in 2010, $92 in 2011 and $102 in 2012. The estimate for 2013 is $111, a gain of 9%. The average P/E multiple for the S&P going back to 1954 has been 16.4 and it has been 14.4 for the last 10 year’s average.
After four consecutive quarters of negative G.D.P. growth, we have had 14 consecutive quarters of positive growth, starting with the third-quarter of 2009, every quarter in 2010, every quarter in 2011, and every quarter in 2012. G.D.P. rose by 2.2% in 2012, and is projected to increase by 2% in 2013, according to various surveys.

Donald M. Selkin

Don Selkin is the Chief Market Strategist at National Securities Corporation, member FINRA/SIPC, (NSC) and provides the Fair Value analysis for CNBC each morning. The commentary provided in this Market Letter is intended to provide our customers with timely market analysis and should not be considered a research report. This Market Letter may contain, and is limited to: Discussions of broad based indices; Commentaries on economic, political or market conditions; Technical analyses concerning the demand and supply for a sector, index or industry based in trading volume and price; Statistical summaries of multiple companies’ financial data, including listings of current ratings; and, Recommendations regarding increasing or decreasing holdings in particular industries or securities. This Market Letter does not make a financial or investment recommendation or otherwise promotes a product or service of the firm. This Market Letter contains only news, facts, and commentary on information previously reported from a news source believed to be accurate and reliable by the author. These news sources include the following: {Bloomberg Financial, Reuters, Associated Press}.