Dismal Jobs Report Sends Stocks Sliding
Last Friday, while domestic markets were closed for trading, the Labor Department announced that only 120,000 jobs were added in March, 85,000 short of the 205,000 expected by economists. This weak jobs report sent foreign stock markets lower last Friday, folowed by U.S. markets this week.
By Wasif Latif, Vice President, Equity Investments
The S&P 500 declined 1.99% on the week to close at 1,370. Treasury bonds rallied in price, with the yield on the 10-year dropping to a 1.99% yield, down 0.06% on the week. Gold rallied to close the week at $1,658 per ounce, up 1.33%.
With 10-year Treasuries yielding less than 2%, we share the view that long-term U.S. Treasury bonds, which used to be viewed as offering risk-free returns, appear to us to offer return-free risk. We prefer the “spread” sectors of the U.S. bond market, such as corporate and municipal bonds where investors can earn significantly higher taxable-equivalent yields than they can on similar maturity Treasuries. In other words, we believe investors are being compensated for taking well-calculated credit risk instead of interest-rate risk in the current environment.
The Federal Reserve released its Beige Book on Wednesday and indicated the economy is currently expanding at “a modest to moderate” pace. The language was similar to previous releases and did not provide any strong evidence suggesting the Fed is likely to engage in additional quantitative easing in the near future.
Additionally, consumer credit expanded in January by $8.7 billion, but this was driven by increases in non-revolving debt, particularly student loans. Revolving debt posted its second consecutive monthly decline.
U.S. economic data has softened during the past two weeks following a strong stretch of data to begin the year. The reversal may be a sign that the effects of warm winter weather throughout the U.S. artificially boosted recent data points. While decelerating somewhat, the recent data remains consistent with our view of a slow but growing economy.
Earnings season kicked off this week with Alcoa’s Tuesday announcement of better-than-expected results. Other notable companies announcing better-than-expected first quarter earnings include Google, JP Morgan and Wells Fargo. Current consensus estimates for 2012 S&P 500 earnings are approximately $104 per share, up 8% from 2011 levels. At a current price-to-earnings ratio of 13 times estimated 2012 earnings for the S&P 500 index, we view U.S. stocks as modestly attractive for long-term oriented investors.
We think earnings will continue to be a focus of investors next week. Several prominent companies are scheduled to report, including Citigroup, Johnson & Johnson, IBM, Intel, Omnicom and American Express.