A confluence of events in Europe last week sent the broad market stock indicies crashing 1000 points intra-day. The Dow Jones Industrial Average fell below the 11,000 mark, and the bears decided to make a little run into this 12-month bull market.
Setting aside any potential human error on the trading side, we know that the markers generally hate uncertainty; and things had been fairly uncertain with regard to how the European Central Bank would respond to the debt crisis in Greece. Things came to a head last week, during the same time the UK elections left a hung parliament (no political party with a clear majority) for the first time since the 1970’s. Uncertainty times two for a very important political and economic region.
As the European Central Bank’s rescue package became clear by Monday morning, markets began to recover. When a coalition UK government (the conservative Tories and Liberal Democrats formed a cooperative majority in parliament) was announced, UK markets reacted dramtically; and all of a sudden the Dow is flirting with the upper 10,000’s again.
With more European debt issues likely in the future and a mid-term election later in the year in the US, you can imagine more market volatility is in the offing. Right now the economic domestic data still looks good:
• April was the 4th month in a row of positive employment growth, adding 300,000 new jobs, which was well above estimates.1
• Strong factory orders for March announced this week affirm the strength in the manufacturing sector. Excluding the volatile transportation component, orders recorded the strongest month in 5 years.2
• Becoming the standard of recent quarters, companies are beating Wall Street earnings estimates. Earnings improvements are beyond the benefits of cost cutting as 75% of companies within the S&P 500 have reported higher top-line sales from a year ago.3
• In response to the good earning reports and economic indicators, future earning estimates continue to enjoy upward revisions for all of 2010 and 2011. 4
Last week’s events continue to remind us of the interdependencies of world economies.
1 Bloomberg, May 7, 2010
2 Bloomberg, May 4, 2010
3 Zacks Investment Research, May 4, 2010
4 Standard & Poors, operating earnings estimates, May 4, 2010
