Market Health: Spring Allergies or Something Worse?
Written by: Jeff Kleintop04/24/12 - 8:20 AM EDT
The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
NEW YORK ( TheStreet) -- In April, the markets seem to be suffering from a case of spring allergies. One day they are feeling better and climbing higher, the next they weaken and drop.
Like pollen-induced sneezes, the almost involuntary market spasms at each of the data points have resulted in a noticeable uptick in volatility after a very quiet first quarter. In fact, so far during April nearly half of the trading days, six out of 14, have seen more than a 1% swing in the S&P 500. This is just one day less than the seven 1% swing days in the stock market during the entire first quarter.
The symptoms are not likely to clear up this week. The allergens floating around the U.S. this week that markets may react to include: the Fed meeting, first quarter earnings reports, and key economic data.
The Fed may not offer enough insight on a potential QE3 -- a third round of quantitative easing -- that investors seem to be looking for after recent economic data.
First-quarter earnings reports thus far generally exceeded analyst estimates by a wide margin without material downward revisions to upcoming quarters' estimates. Yet the stock market, as measured by the S&P 500, was up only about 0.6% last week and investors' bar of expectations may now be even higher as the earnings reporting season nears the halfway point later this week.
Among the economic data released this week, initial jobless claims will be closely watched to see if they make a third consecutive week of deterioration and qualify as red flag number five out of our 10 leading indicators of another spring slide in the stock market and other "risk assets." (See " 10 Indicators to Watch for Another Spring Slide " from March 26 for more details).
Chart 1: Another April Spike in Initial Jobless Claims Coming?
Source: LPL Financial, Bloomberg data April, 23, 2012
The real test for the markets this week may come from overseas as markets react to the French elections and accompanying policy uncertainty, the recession worsening in Europe and, finally, Spanish banks earnings reports.
We will have to see what Socialist Party candidate Francois Hollande's victory in the first round French presidential election on Sunday, April 22 means to European politics and the French-German relationship in leading the unified anti-crisis programs. Hollande's socialist political ideology may make for a difficult relationship with Germany's right-leaning Chancellor Angela Merkel. In addition, French domestic politics could change with higher spending proposals likely under Hollande -- he has stated an intention to renegotiate European treaties on deficit limits--and could push French bond yields higher.
As the European recession deepens -- evidenced this week by a disappointing European manufacturing report for April -- for the first time since before Japan entered its multi-decade slump, German two-year bond yields have dipped lower than those of Japan, at around 0.1%. This decline in two-year yields to near zero reflects both a flight to quality within Europe, as money leaves Spanish and Italian bonds, and a deteriorating outlook for growth. The specter of a lost decade is overhanging Europe as it echoes the post-bubble Japanese economy in the 1990s defined by troubled banks, a deepening recession, a volatile stock market, and very low yields.