March was not a month for the faint-hearted. With the market’s performance showing both sharp downturns and solid rallies, the stock market proved as volatile as early spring weather, ending the month cheered by much-needed positive economic news.
Investor optimism was jolted in the first weeks of March by lackluster labor reports and by geopolitical jitters. The month began with disappointing labor news indicating continued weakness in job creation during February and an unemployment rate unchanged at 5.6 percent. The bears, noting the loss of some 2.2 million jobs since Bush took office, warned of the inevitable consequences of a jobless recovery and forecasted an imminent market correction. This pessimism, combined with the uproar created by Greenspan’s dire predictions regarding the Social Security shortfall facing the nation’s 77 million baby boomers, caused an early March sell-off. As both the Dow and the Nasdaq dipped, pundits declared that the much ballyhooed market correction might finally be under way. Greenspan’s later back-pedaling on the shortfall issue proved a temporary band-aid.
The real catalyst for the March market correction occurred during the second week, when news reports indicated the terrorist bombings in Madrid--previously attributed to Basque separatists--were linked to Al Qaeda. This professed connection prompted an initial major sell-off, which left the Dow, the Nasdaq and the S&P 500 at their lowest points since December 2003. Blue chips nose-dived 170 points over a four-day period -posting their biggest loss in almost 18 months. If further evidence was needed of the U.S. markets’ vulnerability to terrorist threats from Islamic groups, further bloodshed in the Middle East--this time the assassination of Hamas leader Ahmed Yassin--spurred yet another sell-off, and a later FBI warning of terrorism alerts for Texas oil refineries caused further investor jitters.
Is the Market Correction Over?
Many market analysts believe the correction was a short interlude--and a needed adjustment--to overwhelmingly bullish investor sentiment, and predict that investors will not be paralyzed by concern over geopolitical conflicts. And, sure enough, terrorism fears were set aside as the market responded to overseas market rallies with a month-end rebound.
Many market experts believe that another upward tick is on the horizon. They note that bullish sentiment, as indicated by the latest survey from the American Association of Individual Investors, is about 37 percent, its lowest level since April 2003, but well shy of levels suggesting market doldrums. They urge investors to take advantage of the buying opportunities created by March’s correction.
Strong Economic Fundamentals
The bulls note that, despite continuing doldrums in the job market, the economic fundamentals in the U.S. continue to improve. Good economic news on the domestic front and internationally include the following month-end reports:
- Commerce Department data showed the fastest economic growth in almost 20 years during the last half of 2003. The economy grew at a 4.1 percent annual pace in the fourth quarter of 2003 following an 8.2 percent rate in the preceding quarter.
- National Association of Manufacturers announced that more than half the respondents to their recent survey plan to increase hiring. Pundits anticipate an increase in both executive-level and lower wage jobs due to pent up demand.
- Corporate profits rose again last quarter--for the third consecutive quarter--up 31 percent compared with the fourth quarter numbers in 2002.
- Consumer spending grew at a 3.2 percent annual pace in the last quarter--an increase over the 2.7 percent previously reported.
- Re-sales of single-family homes increased 2 percent in February 2004. Home purchases have topped the six million mark for eight consecutive months.
- Overseas rallies--the Japanese stock market rose 1 percent and the Frankfurt exchange saw a 2 percent rebound--suggest that global recovery is underway.
In summary, the bullish position is that any future terrorism jitters will not have the power to over-ride the market stimulation created by such solid economic fundamentals. Corrections --like the March slide-- can be good news for bold investors in the months ahead.