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Dollars and Sense: When a market correction is a good sign

Money

Stocks down, but stable. Last Friday, stocks headed down sharply, and they continued the decline on Monday. But the good news is that the retreat was not random. On Monday came data that factories expanded at a much slower pace in January than in the recent past. Construction spending was up just 0.1 percent in December, less than expected, and auto sales at General Motors (GM) and Ford disappointed. Ford sales were down 7 percent from a year ago. GM sales dropped more than 11 percent. Of the “Big Three,” only Chrysler saw a sales increase. Most analysts are not panicking, though, saying a market correction was both expected and a positive sign that “irrational exuberance” that leads to a bubble is decidedly absent.

Microsoft news. As if to prove that theory, Wall Street traded higher on Tuesday. The Dow got a boost from software giant Microsoft, whose shares rose after it named company insider Satya Nadella as its new CEO, replacing Steve Ballmer. Microsoft is trying to reinvent itself in a tech world that has gone increasingly mobile. I would add, in a footnote, that because Nadella is Indian, news of his appointment made front page news in just about every newspaper on the subcontinent and was a source of national pride.

Mixed news. By midweek, it looked like the bear had been corralled if not completely tamed. U.S. stocks were mixed on Wednesday, as was the news. We saw a weaker-than-expected report on private industry job creation issued by payroll processor ADP, which said private employers added 175,000 in January. That was 10,000 below expectations but still in line with recent monthly gains. The Institute for Supply Management’s non-manufacturing index, on the other hand, rose to 54 in January, above analyst expectations and above December’s 53 reading. (Any reading above 50 indicates growth.) Both reports suggest recent weakness in previous economic reports was weather-related and not a sign of an economy in trouble.

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Stabilization continues. Stocks rose again Thursday. A bigger than expected drop in jobless claims is getting much of the credit for the rise. The number of Americans filing for first-time unemployment benefits fell by 20,000 to 331,000 in the past week, which was better than the 335,000 first-time claims Wall Street was expecting. Though the broader markets made gains, Twitter made news by falling more than 20 percent. The social media network beat revenue projections when it released its corporate earnings report Wednesday, but fell far short of user growth expectations.

The week ahead. It’s a relatively quiet next week for economic reports, though we will get a couple of big ones. A report on retail sales for January comes out on Thursday, and one on industrial production comes out on Friday. Both these reports have market-moving potential. Earnings season is coming to an end, and so far it looks to be a good one. Historically, companies beat analysts’ expectations 63 percent of the time. This quarter, it looks like companies will beat expectations at a rate significantly above the historical average. That’s a sign that current stock prices—at least as a multiple of earnings—are not inflated. It’s likely on Monday we’ll also see some effects of the unemployment report. The rate ticked down a tenth of a percent, to 6.6 percent. That’s a five-year low. But the number of new jobs created—113,000—was much lower than expected. 

Warren Cole Smith
Warren Cole Smith

Warren, who lives in Charlotte, N.C., is vice president of WORLD News Group and the host of the radio program Listening In. Follow Warren on Twitter @WarrenColeSmith.

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