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Thursday, March 10, 2011

Dow craters more than 200 points

Several economic reports this morning have pushed Asian markets, then European markets, and now U.S. markets down hard.  China reported a trade deficit in February, with monthly exports growing by only 2.4% from the year-earlier period, while imports grew 19.4%, after soaring 37.7% and 51%, respectively, in January. Although this takes a bit of pressure off of China in terms of the external political pressure to allow their currency to float freely against other currencies, it indicates that global demand may be weakening.  

The news from China spanked Asian markets, which spilled over into Europe.  Spain was downgraded by Moody's to Aa2 from Aa1, based on concerns that the restructuring of their banking system will cost much more than the government is predicting.  

Here at home, we had 26,000 new jobless claims for state benefits last week, which was higher than expected, and our trade gap widened unexpectedly and sharply.  The U.S. trade deficit widened by 15.1% in January to $46.3 billion, reported by the Commerce Department.  The deficit is the largest since June 2010 and came despite a record level of exports. The trade deficit was well above the consensus forecast of Wall Street economists of a deficit of $41.5 billion. Imports rose 5.2% in January, the biggest gain since March 1993, easily outpacing a 2.7% gain in exports. The U.S. trade deficit with China widened to $23.2 billion in compared with $18.3 billion in the same month last year. The trade deficit had added an impressive 3.4 percentage points to growth in the fourth quarter. But the wider deficit in January suggests trade will be a drag on first quarter growth, which is exactly what we don't need.

Stock futures were weak early, prior to the market open, and the Dow plummeted 200 points right off the bat. The S&P 500 is down 22 points, and the NASDAQ is off 53.  Commodities are also down, with oil giving up about 3% and gold down $23 per ounce.  The only stock in the Dow that is up is McDonald's.  In short, it's ugly out there today.

Although the combination of news items today is certainly negative, the fundamental issue is the rich valuations in stocks and commodities.  Anytime valuations are extended, it doesn't take a lot to knock prices down.  Investors are looking for any excuse to sell and lock-in profits, and also don't want to give back what they have fought so hard to earn over the past year.  Tax season is upon us as well, so we could see selling to raise cash for tax payments also. 

Yesterday was the one-year anniversary of the start of the bull market (March 9th, 2010) and we have seen impressive gains in stocks over the past 12 months.   The real question is; Where do we go from here?   

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