After a meteoric climb in the first quarter, US equity markets finally began to come back down to earth this week. The question now is whether this week’s retreat is the start of a more dramatic pullback.
Just the previous Friday, the S&P 500 charged to a new all-time high, joining its cousin the Dow Jones Industrial Average in making history early this year. The thesis behind the bull-market run has been built on massive liquidity from the US Federal Reserve, solid corporate earnings and steadily improving economic indicators.
These strengths until now have more than offset some of the gloomy issues shadowing the global economy, such as the eurozone crisis and severe US budget spending cuts.
The Dow Jones Industrial Average closed on Friday at 14,565.25, trading sideways over the week with a dip of 0.1 percent.
The tech-rich NASDAQ Composite Index settled at 3,203.86, down 1.9 percent, and the S&P 500, the broad measure of the equities markets, finished at 1,553.28, down 1 percent.
The week that just ended threw a damper on the bull argument after a series of economic indicators came in weaker than expected.
The Institute for Supply Management (ISM) published data showing growth in the manufacturing and service sectors slowed last month.
The mediocre ISM figures were joined by poor reports from payrolls processing firm ADP on private-sector hiring and the US Department of Labor on unemployment claims.
However, the biggest disappointment of all came on Friday, when the Department of Labor reported the US added just 88,000 jobs last month, less than half the 192,000 forecast by analysts. The stock market plummeted on the report, but had sharply pared its losses by the close of trade.
“Markets have shrugged off a lot of negative news lately, but that might not be the case going forward,” IHS Global Insight economist Paul Edelstein said.
Still, Edelstein said markets will also be encouraged by the Fed’s stimulus policies and strong recent results in the US housing and consumer markets.
US automakers General Motors, Ford and Chrysler this week reported their best US sales performances since 2007.
“I would expect more volatility,” Edelstein said. “I’m not ready to say we’re in for a market correction, something like a 5 to 10 percent decline.”
However, Peter Cardillo of Rockwell Global Capital said the recent economic signs were consistent with a general slowdown due to the federal budget cuts.
“Data after data we’ve been getting has been weaker,” Cardillo said. “So there’s no question the economy is stalling here and is beginning to weaken.”
Cardillo predicted the market would pull back by 6 to 8 percent in the next month or so.
The first part of next week lacks major economic indicators. The Fed on Wednesday publishes the minutes from its March 19 and 20 monetary policy meeting.
On Friday, there will be fresh reports on retail sales, consumer confidence and wholesale inflation.
Next week also kicks off the quarterly earnings season, with Alcoa reporting after the market close on Monday.