Stocks Struggle as U.S. Economy Continues to Disappoint
Stocks lost ground last week, despite some positive news: The announcement of the largest merger of the year between Heinz and Kraft and more evidence of economic improvement in Europe. Nonetheless, most global benchmarks were down between 1% and 2%.
In the U.S., the S&P 500 Index fell 2.23% to 2,061, the Dow Jones Industrial Average dropped 2.29% to 17,712, and the Nasdaq Composite Index lost 2.69% to close the week at 5,026. More signs of investor skittishness: For the week ended March 25, investors withdrew $11 billion from equity funds. As for bonds, the yield on the 10-year Treasury rose slightly from 1.93% to 1.96% as its price correspondingly fell.
Investors continue to wrestle with disappointing U.S. economic numbers—last week it was a weak durable goods report—and soft company earnings. But while the losses were across the board last week, the recent sell-off and pickup in volatility serve as a useful reminder of the risks lurking in some areas of the market. This was particularly true among the so-called momentum stocks—as well as some that have been acting that way.
Hello Again, Volatility
Not surprisingly, as stocks corrected, volatility spiked. While volatility remains below the long-term average, it is on the rise from last summer’s historically low levels. Last week the VIX Index, a common measure of stock market volatility, traded as high as 17, which was 35% above the week’s low. We see a similar phenomenon in bond markets, where volatility has pulled back somewhat from the February high, but is up around 65% from last summer’s lows, as measured by the MOVE Index.
Financial market volatility has been on the rise due to somewhat mundane issues: slower economic growth, disappointing earnings and anticipation of an eventual rate hike by the Federal Reserve (Fed). Meanwhile, there may be a potentially bigger risk lurking that investors seem to be dismissing for the time being: Greece.
Last week, investors looked past Greece’s unresolved issues and bid up Greek bonds. However, time is running out for the country, which faces a serious cash crunch as early as April 9 when it is scheduled to make a 400 million euro payment to the International Monetary Fund. It is still not clear where the money to make the payment might come from.