Stocks ended with a bang in June, but overall the quarter was disappointing.
After all the bad headlines…a bailout of Spanish banks, JPMorgan’s huge trading loss, the poor job market, Facebook’s failed initial public offering…it’s a wonder stocks aren’t down more this year. Well, actually stocks aren’t down. At the halfway mark of the year, they are up. People think we’re down because memories are short. It feels like the market is worse than it actually is.
2nd Quarter Results:
The year began with investors focusing on corporate America’s record profits and buying stocks. The S&P 500 surged over 12% in the first quarter. It looked like that gain would be totally wiped out in the second quarter. The market worried about Europe’s inability to find a lasting solution to its debt crisis. There was also continued concern with slow job growth in the U.S.
Then came the last day of the trading quarter, June 29th. European leaders announced a broad strategy to funnel money into failing banks and keep borrowing costs down for governments. Stocks soared around the world leaving the S&P 500 down a little over 3% for the quarter.
So far, stocks in the U.S. are beating those in most other countries. European markets are almost all down this year, and several are down more than 10%. Many big emerging markets are down as well with China down 1%, Russia down 7% and Brazil down 14%.
The reason for this is a darkening economic picture. China’s economy is slowing and consumer confidence in the U.S. has sunk for four straight months.
What happens next will probably depend on corporate earnings again. For April through June, they are expected to fall 0.7% from a year ago. That would be the first drop in almost three years. In addition, companies from retailers to technology firms to consumer goods makers are talking down investor expectations for how much they’ll earn over the next several months. For every company raising its expected earnings, nearly four are lowering them. Projections haven’t been that negative in more than a decade.
To add to this, the job market is losing momentum once again. Employers added only 80,000 jobs in June making the third straight month of a hiring slowdown. The economy added an average of 75,000 jobs a month in 2nd quarter. That’s one third of the 226,000 a month jobs added in the first quarter and too few to lower the unemployment rate of 8.2%. It takes about 150,000 new jobs each month to match the new workers entering the work force each month.
In each of the past three years, hopes for a pickup in hiring were fueled by robust gains early in the year. These hopes fizzled, however, as hiring slowed by spring or summer. The slump in hiring last year lasted from May through August. Over that period, the average monthly job gain was 80,000. In 2010, a slowdown from June through September consisted of four straight months of job losses, an average of -76,000.
There are signs that hiring may pick up soon, however. Fewer people are seeking unemployment benefits each week compared to a year ago. The beleaguered hosing market is slowly recovering which could boost job gains in construction and other industries. Monthly job growth is expected to rebound to 139,000 in the second half of this year according to a survey of leading economists.
Prices of homes in most major cities have risen recently. People have been signing contracts to buy existing homes at the fastest pace in two years encouraged by low mortgage rates. The average on a 30-year fixed rate mortgage has fallen to 3.66%, the lowest on record.
In addition, falling gas prices mean that there is more money available for the consumer. Gasoline has dropped to a five month low at around $3.40 a gallon. The combination of falling gas prices and low mortgage rates has kick-started economic growth in the second halves of the previous two years. Hopefully this will happen again this year.
Bruce A. Kraig, MBA, CFP
July 5, 2012
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