Here we are again: Dow 10000, or very close to it.
After another triple-digit slide Friday afternoon, the Dow Jones Industrial Average fell back below a benchmark that holds some psychological significance for individual investors keeping an eye on the headlines. But market watchers say that given current volatility, traders should get used to seeing this particular round number – from both sides.
Since the beginning of May, the Dow has made a three-digit move in either direction on 17 out of 24 trading days. The steepest loss over that period came on May 6, the day of the four-digit “flash crash.” The biggest gain came just two trading days later, on May 10.
Even Friday’s drop essentially just erases Wednesday’s 2.2% climb, says Jamie Cox, a managing partner at Harris Financial Group. “This is really just a reset more than anything else,” Cox says.
Cox and other investment professionals say the current volatility is a sign that stocks are trading on news, not fundamentals. Many individual investors are holding cash or fixed-income investments now, staying on the sidelines of the stomach-churning stock market and leaving the Dow’s direction to hedge funds and other “fast money,” Cox says.
That short-term focus could also help explain why the Dow seems to have developed a tendency to drop at the end of the week, says Frank Ingarra, a portfolio manager at Hennessy Funds. Since the beginning of May, the Dow has ended in the red on four out of five Fridays. With markets reacting sharply to every headline, short-term traders may want to “close their books for the weekend” in case more bad news breaks, Ingarra says.
All this volatility “wears on the long-term investor, they start getting seasick, and they just exit the markets,” Ingarra says. That’s understandable, but it’s a mistake – investors should still be long on quality U.S. equities, he says. In fact, these quick drops can create some buying opportunities for investors with a long-term focus, Ingarra says.
Here’s what four market watchers have to say about how to interpret the Dow’s latest drop:
Tom Samuels, portfolio manager for the Palantir Fund:
“Whether it’s coincidence or not, there’s a lot of buying and selling going on right around this level” of Dow 10000, Samuels says. “I wouldn’t be at all surprised to see this volatility continue.” The market is losing faith in the economic recovery, and rightfully so, he says. Friday’s disappointing report on the employment situation is another sign that the building blocks of a sustainable recovery just aren’t there yet, he says. “If I were betting, I’d say 9000 Dow is much more likely before we get to 11000 Dow from here,” Samuels says.
In the first quarter’s rally, unprofitable small-cap stocks outperformed quality investments – but as the rally loses steam, that trend should reverse, he says. Samuels recommends investors focus now on solid companies with positive free cash flow, low debt and balance sheets that can fuel further growth. He says he’s bearish now on the travel sector in particular, which is likely to suffer from another slip in demand this year.
Jamie Cox, managing partner of Harris Financial Group:
Friday’s drop was driven by the euro’s sharp slide below $1.20, a key technical level and a low the currency hasn’t seen since 2006, Cox says. Currency fluctuations tend to hit stocks hard as traders are forced to unwind their carry trades, he says. The current volatility is likely to continue, with the Dow bouncing between about 9800 and 10,800 through the summer, but later in the year, markets should turn positive again because corporate earnings are rising and price-to-earnings ratios will eventually rise to reflect that, he says.
Friday’s jobs report may have missed expectations, but it still contained good economic news, as manufacturing employment improved, and a pickup in durable goods production should have wider impacts along the supply chain, Cox says. Individual investors should disregard volatility, he says. In the next 12 to 18 months, inflation is likely to pick up, making it all the more important for investors to be able to capture some real growth, he says.
Frank Ingarra, portfolio manager at Hennessy Funds:
“It’s all headlines” moving the market now, Ingarra says. Even though Friday’s unemployment report disappointed, traders are seeing more overtime hours and more hours worked overall, which typically happens before hiring picks up, he says. In general, leading economic indicators are positive now, he says.
Ingarra says he expects market gauges to be higher at the end of the year than they are now, but he’s keeping an eye on overhanging political and economic risks that could change that outlook, including the situation in Europe and any potential changes in offshore drilling policy that might impact oil and gas prices.
Ethan Anderson, senior portfolio manager at Rehmann Financial:
Dow 10000 does have some psychological significance, but it may be losing its impact now that the market has been hovering around this number for so long, Anderson says. Friday’s slide was sparked by the disappointing jobs report and more bad news out of Europe, he says.
“The tide might be going out right now, but at some point it will be coming back in,” Anderson says. Companies are enjoying record year-over-year profit growth, and traders are seeing broad economic growth, but it may take a while for employers to really feel comfortable hiring after the shock of 2008. After 2009’s spectacular gains, “you’ve got to give people a chance to take some profits,” but markets are still likely to see modest single-digit percentage gains for the year, he says. For an investor with 10 or more years to go before retirement, dips like this are excellent buying opportunities, he says.
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