Will a Summer Rally materialize after May’s drop? By Ken Mahoney
The month of the “flash crash” is finally over. In the end, the Dow managed to put together its worst May drop since 1940, and its biggest monthly drop since February 2009. The selloff snaps three straight months of gains, and marks the first major 10% correction since the bull market began over one year ago.
Extraordinary volatility saw the market rise or fall more than 1.5% on nearly half of the trading sessions in May, and investors didn’t like the feeling. Fear prompted a flight to safety as the overall sustainability of the economy was called into question. For the month, the Dow fell 7.9%, the S&P fell 8.2%, and the Nasdaq fell 8.3%.
On the bright side, some analysts are predicting that May’s slump will pave the way for a healthy summer rally. Conversely, while there are many positive signs of recovery in the U.S. economy, Europe’s debt crisis, combined with increased tension between North and South Korea, are key factors dragging stocks downward. And although Greece isn’t stealing quite so many headlines as a few weeks ago, many eyes are now focused on Portugal, Ireland, Italy, and Spain as the world wonders if the $1 Trillion aid package will be enough.
As traders return from a long holiday weekend, the big question is whether ongoing pressure will push the correction into a bear market – a selloff of at least 20% from a high – or if investors will treat recent declines as a buying opportunity.
Key things to watch this week:
Monday – U.S. Holiday: Memorial Day – Markets Closed
Tuesday – ISM Manufacturing Index, Construction Spending
Wednesday – Pending Home Sales
Thursday – Jobless Claims, Productivity and Costs, Factory Orders
Friday – Employment Situation
Data as of 05/28/2010 1-Week Y-T-D 1-Year 5-Year 10-Year
Standard & Poor's 500 0.16 -2.30 18.5 -1.82 -2.09
Dow -0.56 -2.79 19.3 -0.77 -0.16
NASDAQ 1.26 -0.53 27.2 1.74 -2.95
MSCI EAFE 1.09 -13.5 5.68 -1.40 -1.47
10-year Treasury Note (Yield Only) 3.21 N/A 3.46 3.97 5.72
Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance, Google Finance, Barron’s, djindexes.com, MSCI Barra. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not available.
HEADLINES:
The numbers being batted around when it comes to how much the oil spill will ultimately cost BP and the local Gulf of Mexico economies are huge. $3 billion. $14 billion. One politician put it at over $100 billion. The range is so big because two important questions remain unanswered: When will the leak be sealed, and will most of the oil wash ashore? Until those are answered no one will know the price tag of the damages for sure.
Personal spending was flat in April, after six months of increases, while income rose, according to a government report released Friday. The Commerce Department said individual spending rose less than 0.1%, or $4 billion, last month after an upwardly revised 0.6% increase in March. Personal income climbed 0.4%, or $54.4 billion, in April following an upwardly revised 0.4% rise the month before.
The greenback on Friday notched its longest string of monthly gains, six in a row, against the euro since 2000 amid worries about massive debt and fiscal cutbacks needed in Europe -- and the euro made its biggest monthly drop since January 2009.
Several downtrodden U.S. cities are on the verge of defaulting on their debt, putting financially encumbered states and taxpayers on the hook to pick up the tab. The National League of Cities says municipal governments will probably come up $56 billion to $83 billion short between now and 2012.
Sales of newly built homes soared 14.8% in April from March as buyers rushed to take advantage of the expiring government tax credit. Sales in April were 47.8% higher than a year earlier.
