What a Week: Confidence Takes a Powder
Friday's stronger-than-expected first-quarter GDP report provided only a temporary salve for the ailing stock market, which foundered into the close, providing a fitting ending to a frustrating week for the bulls.
The government reported that first-quarter GDP rose 5.8%, up from 1.7% in the fourth quarter and well ahead of the consensus forecast of 5% growth. But news of the fastest pace of growth since the fourth quarter of 1999 didn't give equities a lift for very long.
After trading as high as 10,082.67, the
Dow Jones Industrial Average
closed down 1.2% to 9910.72. The
S&P 500
fell 1.4% to 1076.32 after trading as high as 1096.45, while the
Nasdaq Composite
shed 2.9% to 1663.90 vs. its earlier best of 1728.52.
More troubling, major averages closed below key technical support levels detailed
here Thursday night. Specifically, the Comp fell below its Feb. 22 intraday low of 1696.66, while the S&P breached support at 1086 -- and just above its Feb. 22 intraday low of 1074.48 -- while the Dow closed in four-digit territory for the first time since Feb. 22.
For the week, the Dow fell 3.4%, the S&P 500 shed 4.3% and the Nasdaq Composite lost 7.4%; those are the worst weekly losses for market proxies since the week after the Sept. 11 terrorist attacks.
Yes, trading volumes weren't overwhelming Friday -- they were weak all week -- but that doesn't negate the damage done. In addition to faltering equities, the dollar's slide and renewed gains for gold and crude prices were noteworthy.
That confluence of market indicators has some braced for more losses next week, even the much-ballyhooed "capitulation" selloff. But as reported
here, the number of traders still
hoping
for such an event may prevent its onset.
Beating, but Not Inspiring the Street
More on the GDP report follows, but its inability to inspire buyers was matched by the slim impetus provided by the week's mainly stronger-than-expected quarterly earnings -- notwithstanding disappointing results from firms such as
ExxonMobil
(XOM) - Get Report
,
VeriSign
(VRSN) - Get Report
, and
Dow Chemical
(DOW) - Get Report
.
Overall, first-quarter earnings topped analysts' forecasts by an average of 3.2% vs. an average of 2% since 1990, according to Thomson Financial/First Call. Of the 384 S&P 500 components to have reported thus far, 62% bested expectations vs. an average of 52.7% since the mid-1980s.
But first-quarter earnings are expected to decline 11.7% from year-ago levels, and 43% of guidance for second-quarter results was negative vs. 39% positive, Thomson reported. For example,
General Mills
(GIS) - Get Report
tumbled 5.2% Friday after slashing its earnings guidance.
"Stocks were priced for that perfect recovery that is not occurring," commented Kent Engelke, capital markets strategist at Anderson & Strudwick. "Second-quarter estimates are falling daily. To justify valuations, profits must materialize."
Further calling valuations into question this week were concerns about U.S.-Saudi relations and its impact on crude prices, as well as the
Securities and Exchange Commission
picking up the New York attorney general's probe into Wall Street's disclosure policies, notably
Merrill Lynch
(MER)
, whose chairman offered a heartfelt apology. For the week the Amex Broker/Dealer index shed 9%.
News that
Tyco International
(TYC)
was reversing a breakup plan and lowering its guidance, and that
AOL Time Warner
(AOL)
may be headed to divorce court also weighed on investors' confidence.
Additionally, accounting concerns dogged shares of
Dynegy
(DYN)
and
Network Associates
(NET) - Get Report
, while a host of big-cap tech names -- from WorldCom
(WCOM)
to
Microsoft
(MSFT) - Get Report
suffered continued selling pressure. For the week, the Nasdaq 100 fell 9.9%. The Philadelphia Stock Exchange Semiconductor index fell 14.7% for the week, which it ended below its 200-day moving average.
Gee ... No, GDP
As to why the apparently blockbuster GDP report didn't fuel optimism, we recall a recent report by James Padinha, economic strategist at Arnhold & S. Bleichroeder.
In its
March 19 statement, the Federal Open Market Committee described how the "marked swing" in inventory investment was causing the economy to expand at a "significant pace," Padinha noted. But the central bank also stressed the "strengthening in final demand" -- an "essential element" to sustained expansion -- remained uncertain. (In
Congressional testimony last week,
Fed
Chairman Alan Greenspan said "little, if anything, has happened since the
March 19 meeting to alter
the Fed's assessment.")
Knowing a "huge contribution" from a reduction in inventories would produce a big first-quarter GDP, the Fed "places much less importance on the GDP figure than it does on the performance of final demand going forward," the strategist wrote.
Padinha's advice was that investors should "ignore" the GDP report, at least ignore the headline GDP jump as a harbinger of Fed policy. Details of the report suggest the recovery may not be so robust, something that wasn't lost on equity traders.
Inventory reduction added 3.1% to GDP last quarter, its biggest contribution since the fourth quarter of 1987. Consumer spending grew at a 3.5% annual pace, down from 6.1% in 2001's fourth quarter. Government spending rose at a 7.9% annual pace vs. 10.2% in the previous three months.
Real final sales, a.k.a. final demand, rose at an annual rate of 2.6%, more than expected but down from 3.8% in the fourth quarter. Additionally, capital spending continued to decline, including a 0.5% drop in equipment and software. Although equipment sales, excluding transportation, rose, the GDP report in combination with
Thursday's weak durable goods report indicates business spending remains weak.
Corporate America had little news this week that suggested otherwise, resulting in concerns about the sustainability of the recovery, as well as worries about the wisdom of holding equities.
Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
Aaron L. Task.
