We’ve had a number of important news developments come in the last few days, and it has added some uncertainty that has put the stock market on pins and needles.
First, the jobs number on Friday was a bit of a disappointment. Employers added just 115,000 positions in April—so while it was the 16th straight month of jobs growth, it was below the critical 200,000 job creation level necessary for a strongly growing economy.
And though the economy really didn’t create all that many jobs this month, the unemployment rate went down to 8.1%, mostly due to folks dropping out of the workforce. In fact, if the labor force hadn’t shrunk so much in the past three years, the unemployment rate would currently be over 11%.
I definitely expect that this little detail will come up in the Presidential debates here in the U.S. in the fall—President Obama is going to focus on the fact that the household survey figures, which in March were the strongest in four years, are a leading indicator of good things to come in the job market, while Mitt Romney will talk about the slack and underemployment in the workforce that has caused personal income to decline under President Obama’s watch.
And while we’re still about six months away from our election here in the U.S., around the world the election results are flooding in and creating more questions than answers.
First up, socialist candidate Francois Hollande defeated incumbent Nicolas Sarkozy for the French presidential election on Sunday. This wasn’t exactly unexpected, but international markets got a bit shaky on the news because Hollande is expected to be less cooperative with European allies than Sarkozy. The cooperative relationship between Sarkozy and German Chancellor Angela Merkel helped bail out a number of eurozone countries, and now that relationship is threatened.
If France and Germany grow less cooperative, we could see some big changes to the austerity-based debt relief packages that have so far been working—or at least have been successful in preventing immediate collapse of certain countries. Plus, this would also likely lead to the euro growing weaker, while the U.S. dollar would strengthen.
The reason why a weak euro is a concern is because the only way to combat it is to raise interest rates. As we’ve experienced here in the U.S., if you raise rates, you raise your government debt. Given that France has a debt problem that is not so different from our own here in the U.S., if French rates start to rise, then its fiscal problems mount.
Then there was news that voters in Greece dealt major blows to the country’s two most established parties in parliamentary elections. They left neither party with enough votes to establish a majority and take the reins of leadership. Now the two parties are trying to cobble together a coalition government, so far without much success.
If other European nations take cues from these two elections and start throwing out politicians who demand austerity, then existing sovereign debt deals might begin to be watered down. Obviously, no one wants to go down that road again.
So, the market’s recent volatility and today’s near 200-point decline on the Dow comes from uncertainty. Once investors get more insight into new leaders and governments, they will be more at ease.
Plus, investors are very bullish on the near- and long-term outlook for stocks.
I did a survey a few weeks ago asking investors where they thought the Dow would close at the end of the year. The overwhelming majority responded that they expected the Dow to close at or above 14,000—an 8.8% gain from today.
And just last week I posted a follow-up survey that asked how many people planned to sell in May and stay in cash or cash equivalents during the summer. It was just a small minority that voted that they were definitely planning to sell stocks and walk away from the market this summer.
This is a very bullish sign, and I am so proud of our investing community. They aren’t going to let a little volatility keep them from profiting.
They know what I know, and that is that investors are still keeping a very close eye on earnings—and that is important.
If you stick with companies that post strong earnings and sales growth, you’re going to be just fine through this patch of volatility. Just look at Generac Holdings (GNRC). This company reported earnings today that beat expectations, and the stock jumped 30% on the news.
I’ll be in touch throughout the week if there is any important breaking news. Until then, my advice is to use days like today to pick up shares in fundamenatlly sound companies. If you need some help identifying such companies, let Portfolio Grader be your guide. My Best By Fundamental list is a great place to start.