The turbulence that began as we entered the current quarter turned into a relatively steep drop in the first half of May. That continued with the S&P 500 on track to fall 3 percent this week as the key issues over the past few weeks — Greece exiting the eurozone or not; slowing global growth; and rising concern over U.S. debt, spending and the pending fiscal cliff at year’s end — remained at the top of the news.
The latest readings on the European and Chinese economies from Markit Economics were released this week, and those purchasing managers indexes fell in May. More specifically, the Flash Eurozone Manufacturing PMI fell to 45.0 from 45.9 in April and marked a 35-month low. In PMI readings, below 50 indicates a contraction and above 50 implies an expansion.
While much talk has been in the press about Greece, Spain and Italy, the May data show that Germany posted a marginal fall in manufacturing and services output, the first such contraction since November and the second in 34 months. Turning to China, the HSBC Purchasing Managers’ Index showed that manufacturing dipped in May to a two-month low with a reading of 48.7.
Back at home, the Congressional Budget Office, the official budget and economic analyst for lawmakers, sounded the alarm bells on the fiscal cliff this week when it said the U.S. economy would contract at an annual rate of 1.3 percent for the first half of 2013 if lawmakers take no action to prevent the looming tax increases and spending cuts.
In addition, a number of companies reported weaker than expected results or pared back their outlooks this week. They included Dell Inc., Lowe’s Cos., storage and data management company NetApp and American Eagle Outfitters Inc. Now layer in the disastrous initial public offering for Facebook, some fresh downsizing, not only from the likes of Hewlett-Packard Co. and General Mills Inc., but also Google Inc.’s laying off up to 30 percent of newly acquired Motorola Mobility Holdings, and it’s easy to see why some investors are discouraged while others are throwing in the towel — at least for now. Investors have withdrawn roughly $21 billion in U.S.-based equity funds over the past month, according to Thomson Reuters Lipper.
Despite the pressures weighing on the market, some well-positioned companies are executing and delivering. The silver lining to the market pullback — the S&P 500 has dropped nearly 7.5 percent since early April — is that stocks have become cheaper not only in an absolute sense (the actual stock price) but also in terms of valuation. By valuation, I mean the measurements investors use to gauge how a security is priced among its peers, its trading history and the overall stock market.
The retrenchment in the S&P 500 from its recent peak has resulted in the overall market being less expensive. This is reflected in the move in the S&P 500’s price to earnings-per-share multiple, which has dropped from 13.9 in early April and sits near 12.9 times 2012 earnings expectations. While many are frozen like a deer in the headlights, proactive investors are revisiting those shopping lists I wrote about a few weeks ago.
While many will be giving thanks for the long weekend ahead of us, just as many will be looking forward to the shortened week next week, which will be chock-full of economic data. Given the May readings on the European and Chinese economies mentioned above, many, including myself, will focus on the May employment report as well as the latest snapshot on personal income and spending looking for telltale signs as to the health of our recovery.
More as it develops, and have a happy Memorial Day.
• Chris Versace is editor of the PowerTrend Brief and PowerTrend Profits newsletters. Visit them at ChrisVersace.com, or follow him on Twitter @_chrisversace. At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.