Making Money Alert
One Step Forward, Another Step Back
06/01/2011
Last week, we saw stocks stabilize a bit after several weeks of declines. The market took a nice step forward in Tuesday’s trading, with the Dow logging a strong triple-digit percentage gain. But on Wednesday, equities took a decided step backward, as traders reacted with unequivocal bearishness to downbeat economic numbers.
A one-two punch of slower-than-expected U.S. manufacturing numbers, and what generously can be described as anemic private sector job growth, set the somber tone for stocks. Midway through Wednesday’s trading, the Dow was down more than 200 points.
If we dig deeper into the data, we find that the Institute for Supply Management, or ISM, manufacturing purchasing managers' index fell to 53.5 in May from 60.4 in April. That’s a sizeable drop in the reading, and a number that was well below economists’ expectations for a reading of 57.
As for the jobs data, the carefully watched ADP employment report showed that private sector employers added a paltry 38,000 jobs in May. That was a drastic shortfall from the 190,000 jobs that economists were anticipating.
If manufacturing data continues to slide, and if the private sector fails to start hiring, we could be in for a very long and uncomfortable summer in the stock market.
Now, in contrast to the decline we’ve seen in stocks is the big boom in bonds. Long-term Treasury bonds, as seen in the chart here of the iShares Barclays 20+ Year Treasury Bond (TLT), are up 3.25% during the past month, a stark contrast to the 1% decline in the S&P 500 index during the same period.
More importantly, TLT now has moved back above its technically significant 200-day moving average, and that could mean more bullish momentum to come in bond land.
In my opinion, I think we are in one of those environments where investors are extremely nervous about the economy’s near-term future, and that means that every data point we see from here on out is going to cause a lot of volatility to both the upside and the downside.
This kind of environment is never comfortable for investors, but it is all part of the game when putting your money at risk. Embrace that fact, and you’ll be in much better shape going forward.