As volatility skyrocketed, stocks continued to free-fall as the major averages are officially in correction territory. Where – and when – this will all end is anyone’s guess. While bull markets don’t die from old age, they do collapse on fundamental economic downturns, which does not seem to be in the cards. As the adage goes: Good news for Main Street does not always translate into good news for Wall Street; and this is certainly the case right now. Strong GDP, manufacturing and wage growth can signal runaway inflation and sharply higher interest rates, and this is what has traders spooked. The ten-year note ended the week at 2.85% vs. 2.39% a year ago. While these headwinds are clearly in view, the market, in my opinion, has overreacted exacerbated by algorithmic trading programs that kick-in at certain technical levels, often ignoring the more obvious fundamentals.
For the week, the Dow tumbled 5.2%, with two trading days of 1,000 plus point declines. The S&P 500, the Dow Transports and the NASDAQ slid by equal percentages on above-average volume. Coupled with last week’s losses, the Dow is off about 10% from its January highs and has erased gains going back to November of last year. The number of NYSE decliners the past week eclipsed advancing issues by about 5 to 1 and recorded 791 stocks with new 51-week lows. Crude oil futures tanked by $6.25/bbl. to settle below $60, sending the energy sector negative by 8.5%, on average. As was the case last week, no industry group was able to avoid the carnage, with safe-haven utilities declining the least at (only) 2.6%.
Clearly, the Street’s complacency has been shaken some. However, strong profitability (and the picture here is bright in that regard) augurs well for investor sentiment as the year progresses. So, while caution remains prudent, we should not overreact to the market’s recent setback and, thus, stick to one’s long-term investment game plan. The drop in prices (and thus valuations) allows for an opportunity to selectively accumulate or add to existing positions in quality stocks with above-average sales and earnings prospects and good dividend growth. Also, the market decline may make corporate buying for selective bolt-on acquisitions more appealing. On the earnings front, we will hear from Applied Materials this week as it delivers its fiscal first quarter results with earnings expected to be $0.98 per share, up sharply from last year’s $0.67. And Deere & Co. reports on Friday with Street estimates of first period per share earnings of $1.19 vs. $0.61, also a nice gain.
Here is the answer to last week’s trivia question: This week, Japan’s Fujifilm Holdings has offered to buy what U.S. company? Eastman Kodak; Pitney Bowes; Xerox Corp. or Electronics for Imaging. Answer: Xerox Corp. Xerox, founded in 1908 as The Haloid Photographic Co., will merge into Fujifilm’s existing joint venture operation – Fuji Xerox.
Today’s Trivia Question: United Parcel Service was formed in Seattle in 1907 as American Messenger Co. The now Atlanta-based package delivery provider made its initial public offering on November 10th of what year? 1909, 1937, 1953 or 1999.