American economy faces another crunch week as US markets slip
US markets slip as American economy faces another crunch week
Dow Jones, Nasdaq and S&P 500 all down at start of week where major American firms report their first-quarter earnings
guardian.co.uk, Monday 9 April 2012 22.28 BST
US stock markets slid Monday as investors reacted to last week’s worse-than-expected jobs figures. All three of the US’s major exchanges were down, with the Dow Jones industrial average closing down 130 points, or 1%, making four consecutive days of losses.
The lackluster start to the week comes as America’s fragile economic recovery faces another crucial test as major US firms report their first-quarter earnings.
Monday’s slip was the first time that traders have been able to react to Friday’s latest numbers from the labor department. With markets closed for Easter and Passover, the government announced that the US economy added 120,000 in March, snapping a three-month streak of 200,000-plus job growth. Most economists had expected an increase of about 200,000.
The news was a blow to Barack Obama, who has put America’s economic recovery at the center of his re-election plans. A fuller picture of that recovery will start to emerge this week.
On Tuesday, Alocoa, the world’s largest aluminum producer, kicks off the beginning of first-quarter earnings season. The company is often seen as a bellwether of the global economy as demand for its products is driven by orders for constructions and manufacturing across the world. Alcoa’s earnings are forecast to have declined about 3¢ in the first quarter of 2012.
Companies have cut staff and costs to the bone, but demand remains sluggish in the US, and Europe is still mired in a financial crisis of historic proportions.
Analysts have been lowering expectations for earnings across the board as the benefits of cost-cutting start to run out and growth remains slow. This week will be a severe test of that thesis across the board, as Google, JP Morgan and Wells Fargo also report earnings.
For the first three months of the year, analysts are expecting companies to grow an average of 0.95% compared to the same quarter last year, according to S&P Capital IQ. In January analysts were predicting 4.5% growth.
Last Thursday, before the holidays, the Dow ended the week down for the third day in a row. But it was still up 6.9% up for the year.
Jack Ablin, chief investment officer of Harris Private Bank, said he expected earnings on average to be one third of what companies had declared in recent quarters. “Putting the jobs report to one side for a moment, even without it we were going to see a real test with these earnings,” he said. “We have had a nice rise in stocks but now we need to see some real, fundamental growth in the economy to pull the markets higher,” he said.
“We need sales, we need revenues, we need purchases,” he said. Now that companies had done most of their cost cutting, the “real picture of what the economy looks like is starting to emerge,” he said.
A worrying sense of déja vu exists for many, said Ken Goldstein, economist at the Conference Board in New York. For the past two years there have been early rallies in the US stock markets that have collapsed. In 2010 an early market rally fizzled out as investors took in the true extent of financial crisis. Last year, Japan’s tsunami, earthquake and the disaster at the Fukushima power plant coincided with the worsening financial crisis in Europe to wipe out the US’s rally. Last week’s disappointing jobs figures stoked fears that 2012 would repear the pattern.
“Personally I don’t think so,” said Goldstein. “I think people may get the feeling that it’s here we go again, but things are very different.”
He said profit growth might be lower in the near future and that the recovery in the jobs market too was likely to be less spectacular. “But as long as you are not expecting a blockbuster, it won’t be that bad,” he said.
The poor jobs report will increase pressure on Federal Reserve chairman Ben Bernanke to step in and pump more money into the US economy, a process know as quantitative easing (QE). So far there have been two rounds of quantitative easing in the US.
Bernanke has recently warned that the US recovery remains fragile and was sceptical of the robust recovery in the jobs market ahead of the last report from the labour department. He has also consistently said that no option is off the table and the Fed will act if the economy takes a turn for the worse.
But the latest minutes from the Federal Open Markets Committee, which sets US interest rates, showed Bernanke and the Fed committee cooling on the idea of further monetary stimulus.
“The Fed is standing in the wings but at some point we need to take the training wheels off and ride this bike ourselves,” said Ablin.