After an up-and-down first quarter that saw the S&P 500 eke out a 0.4% gain and its ninth-straight quarter of gains, stocks are off to a shaky start this quarter.
The Dow Jones industrial fell 78 points, or 0.4%, to close Wednesday at 17,698 and the Standard & poor’s 500 dropped 8 points, or 0.4%, to 2060.
Here’s why stocks are wobbly:
1. Investors are reacting to “old” economic data.
The winter weather was abysmal again, and that hurt the economy — and the economic data tied to the first three months of the year. In the past week, stock investors were greeted with lower-than-expected readings on February durable goods, March manufacturing in the Chicago area, and Wednesday’s misses on February construction, March manufacturing and payroll processor ADP’s March private employment number.
“We are still (reacting to) March and even February data,” explains Mark Luschini, chief investment strategist at Janney Montgomery Scott.
But while the strength of the U.S. dollar will continue to be a headwind for exporters and new orders in the manufacturing space in the current quarter, some of the headwinds will fade, says Luschini.
“The dissipating effects of the horrible weather in the Northeast and the port strike out West, which was a big influence in the first quarter, will begin to show in April,” Luschini says. “It may take a few weeks to get ‘clean’ data, but I suspect better numbers and easy comparisons against January to March data will make the current quarter look a lot better economically.”
2. Profit worries are adding up to angst.
The unofficial start of the first-quarter earnings-reporting season kicks off next week and Wall Street analysts are projecting the first year-over-year contraction in profit growth since the third quarter of 2009. Analysts polled by Thomson Reuters I/B/E/S are looking for profits to shrink 2.7% vs. an earlier forecast of +5.3% back on Jan. 1.
“Investors are beginning to worry about first-quarter earnings reports,” says Michael Farr of money management firm Farr, Miller & Washington.
He rattles off a long list of issues weighing on earnings, in addition to bad weather and the now-ended port strike. He cites the negative impact on energy sector earnings due to plunging oil prices, the hit to profits suffered by multinationals as a result of the surging U.S. dollar and consumers unwillingness to spend cash freed up by lower prices at the gas pump.
The key to earnings season, adds Quincy Krosby, a market strategist at Prudential Financial, will be whether CEOs see better days ahead.
Says Krosby: “The key will be in corporate guidance: will companies offer positive guidance assuring investors that the first quarter was a ‘one off’ due to poor weather and West Coast port-related factors?”
3. Obsession with rising interest rates is hurting risk-taking.
Mixed messages from the Federal Reserve as to when — and how fast — they will start hiking short-term interest rates also has investors on edge, says Krosby.
“The ongoing concern — obsession — regarding the Federal Reserve’s path toward rate normalization” is giving investors pause, she says.
The good news? Many Wall Street pros, including Nick Sargen, senior investment adviser at Fort Washington Investment Advisors, think the first-quarter economic weakness is “temporary.”
“My bottom line: Don’t overreact to first-quarter numbers. I expect a bounce in the second quarter,” says Sargen.
So what is needed to get stocks moving higher again and to make investors more comfortable? Signs of a still-healthy consumer that is willing to spend, says Joseph Quinlan, chief market strategist at U.S. Trust.
“What’s needed: the U.S. consumer to ride to the rescue and drive demand and growth, offsetting negative effects from oil slide and dollar rise,” says Quinlan. “Until then, we drift, with a downward bias.”
