Why stocks could return to their October lows
Investors stumbled across the finish line on Friday to cap a disappointing January.
Stocks melted into the close, pushing the S&P 500 down 1.3 percent for the day to finish below its 125-day moving average and the 2,000 level -- both of which have combined to provide support to the index over the last two months. A continued breakdown would put the October lows back in play, which would mean additional losses of seven percent to nine percent.
U.S. Treasury bonds continued their surge on the back of safe-haven inflows, pushing the 10-year yield down below 1.7 percent, a level it hasn't been at since 2002. The 30-year yield is below 2.25 percent.
A weaker-than-expected initial reading on fourth-quarter U.S. GDP was fingered for the selling, given a slower-than-expected 2.6 percent annualized growth rate vs. the 3.2 percent consensus estimate and the 5 percent growth posted in the previous quarter. A slowdown in business investment, no doubt related to the collapse in oil prices, was to blame.
Stocks trading on newly released corporate earnings reports were mixed. Positive surprises included a 13.7 percent surge by Amazon (AMZN) and a 4.7 percent gain by Google (GOOG) after reporting solid results. Negatives included a 0.5 percent drop in Chevron (CVX) -- which was down as much as 4 percent at its low -- after cutting investment spending on lower crude oil prices and suspending its share buyback program.
And finally, the fate of the Federal Reserve's anticipated June rate hike -- the first since 2006 -- was in focus after St. Louis Fed President James Bullard said in a TV interview it was reasonable to expect the Fed to move on that timetable.
He added that a zero percent interest rate policy was no longer right for the economy and that he'd rather see rate hikes sooner than later to give the Fed flexibility to respond to future problems.
Bullard's comments were notable because they came on the heels of a slightly more-hawkish-than-expected policy announcement from the Federal Reserve earlier in the week. Yellen & Co. upgraded their assessment of the economy to "solid" and continued to dismiss the threat lower oil prices presented to the economy (via corporate profits and investment spending).
Next week will feature another batch of corporate earnings, including results from Exxon Mobil (XOM) on Monday morning and Walt Disney (DIS) on Tuesday afternoon.
We'll also get the January payroll report on Friday morning, sure to be closely watched for indications that solid job creation keeps the Fed rate hike schedule in play. Currently, the unemployment rate stands at just 5.6 percent -- a level that as recently as September the Fed didn't think we'd hit until the end of 2015.
