Markets Smacked As Global Economy Slows

Friday, June 03, 2011
Stock Market Commentary:

Stepping back, stocks and a host of commodities were smacked since the beginning of May which is eerily similar to the same period last year. The “big” news this week that sent stocks lower was a major slow down in the global recovery. All the major averages closed below their important 50 DMA lines on Wednesday and fell back into the multi month downward trendlines.  This lackluster action suggests more sluggish action lies ahead. So far, the old adage, “Sell in May and Go Away,” appears to be working brilliantly.  From our vantage point, the market is back in a correction as the major averages are now flirting with their multi-month upward trendlines.

Monday-Wednesday’s Action- Stocks Slammed As Global Economy Slows:

On Monday, U.S. markets were closed in observance of Memorial Day but other markets across the world were open. The “big” news that helped lift a slew of so-called “risk-assets” (i.e. stocks and commodities) occurred when European officials agreed to another Greek bailout. This sent the euro, and equity futures, surging before Tuesday’s open. In other news, economic data from Asia, Europe, and Canada did not disappoint. Inflation slowed in much of Europe while German unemployment fell, both healthy events for the troubled euro zone. However, not all the news was positive. Denmark’s economy entered a recession after GDP fell -0.5% in Q1. Denmark has now joined Portugal as the only other European nation to be in a recession.  Elsewhere, Canada’s GDP expanded at a 3.9% annualized rate in the first quarter which was nearly double the US’s 1.8% rate but fell short of the 4% expected on the Street. In other news, the U.S. housing market officially is in a double-dip recession as home prices fell another -4.2% in Q1 after falling –3.6% in Q4 2010.

Tuesday’s entire positive move was negated on Wednesday as manufacturing growth slowed from all corners of the globe in May. This added to concerns that the global recovery may be slowing. China and Europe’s purchasing managers’ index showed the slowest rate of growth in nine and seven months, respectively. U.S. factory growth was anemic, falling to the lowest level in one year while manufacturing growth slowed to a virtual standstill in Russia, Poland, and Hungary. Moody’s rating agency slashed Greece’s credit rating further into junk territory on Wednesday which led many to question the healthy of the euro.

Before Wednesday’s open, ADP, the U.S.’ largest private payrolls company, said US employers added fewer jobs than expected in May. The report showed payrolls increasing by +38,000 which was the smallest increase since September 2010 and much lower than the Street’s estimate for an increase of +175,000. Some of the factors that are threatening the global recovery are: rising oil prices, aftermath of Japan’s earthquake, Europe’s ongoing debt crisis, and the age of the recovery (growth tends to be strongest in the early stages of a recovery before leveling out as the recovery losses steam).

Thursday & Friday’s Action – Economic Data Is Weak:

Before Thursday’s open, the Labor Department said weekly jobless claims fell by -6,000 to 422,000 last week. A separate report showed productivity of U.S. workers slowed in the first quarter as labor costs rose. Productivity rose at a +1.8% annual rate after a +2.9% percent gain in the fourth quarter of 2010. After Thursday’s open, factor orders fell by -1.2% in April which missed estimates and was lower than March’s reading of +3.8%. In other news, Moody’s rating agency put a slew of bank stocks on “notice” and will begin investigating their credit ratings. Elsewhere, a slew of high profile retailers reported weaker than expected same store sales. Before Friday’s open, the Labor Department said, U.S. employers added +54,000 new jobs in May which has a huge “miss” as most economists expected a number north of 100,000.

Market Outlook- Market In A Correction

From our point of view, the market is back in a correction now that all the major averages closed below their respective 50 DMA lines and downward trendlines. Since the beginning of May, we have urged caution as the major averages and a host of commodities began selling off. The next level of resistance is their respective 2011 highs. If you are looking for specific help navigating this market, please contact us for more information.

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