Coverage: U.S. stocks erase gains

Stock market investors might be suffering from whiplash these days. The dollar is gaining in value, sending markets down and stocks giving up their gains from last year.

Joseph Ciolli, Oliver Renick and Michelle Davis had this story for Bloomberg:

The dollar’s ascent to highs not seen since the invasion of Iraq sent a shock wave through American stocks, erasing gains for the year on concern earnings are in worse shape than investors recognized.

Dragged down by technology companies and banks, the Standard & Poor’s 500 Index slid 1.7 percent to 2,044.16, extending the loss from last week’s record to 3.5 percent. Shares slid as the dollar posted its ninth gain in 10 days against the euro, a climb that threatens U.S. profits and dramatizes a bigger anxiety for traders, the Federal Reserve.

“It’s hard to stop the trend,” said Bill Schultz, who oversees $1.2 billion as chief investment officer at McQueen, Ball & Associates in Bethlehem, Pennsylvania. “We’re stuck with a stronger dollar until we hear something more out of the Fed about modifying the trend toward higher rates, which isn’t likely.”

While selling U.S. equities has been a money-losing decision for six years, investors are doing it again amid concern wage growth will force the Fed’s hand on rates. They’ve yanked $7.1 billion from mutual and exchange-traded funds tracking American shares and sent $35 billion to other markets this quarter, data compiled by Bloomberg and Investment Company Institute show.

The Wall Street Journal story by Corrie Driebusch said that some of the volatility in the market is coming from uncertainty around when the Federal Reserve might raise interest rates:

While trading volumes were higher than those on Monday, they weren’t extreme, traders said, adding that there was no one reason for the downward move. Instead they cited a retreat from record highs hit last week as well as some increased jitters about how soon the Federal Reserve may raise interest rates following positive jobs data released Friday.

All of the S&P 500’s 10 sectors posted declines. With Tuesday’s drop, the Dow industrials and the S&P 500 are in the red for 2015, a week after both indexes closed at record highs and the Nasdaq Composite ended above 5000 for the first time in nearly 15 years.

On Friday, following the robust jobs report, bond yields jumped and investors sold shares in utility companies. The sector had been very popular in the past few years due to its steady dividend payments. As yields rise, investors tend to move money from utilities companies and other income-yielding stocks such as real-estate investment trusts to bonds.

But in the past month, as expectations grow for a Fed rate increase as early as this summer, the yield on the 10-year note has risen roughly 7.4%, and utilities companies are off about 8.5%. Yields fall as prices rise.

Kate Gibson wrote for CBS News that the strengthening labor market was also an indication the Fed could raise rates soon:

In another sign of a steadily strengthening job market, the Labor Department on Tuesday reported job openings increased 2.5 percent to nearly 5 million in January, a 14-year high.

“It started last week with the strong jobs report putting pressure on the Federal Reserve to start raising rates this year; the problem the Fed has is the U.S. dollar is so strong, if they enter into a series of rate hikes, it’s only going to make the U.S. dollar dollar stronger, and hurt our exports,” said Bruce Bittles, chief investment strategist at RW Baird & Co. “The Fed is between a rock and a hard place.”

Gail MarksJarvis had a great analysis for The Chicago Tribune about why the markets reacted the way they have been:

It’s no wonder investors would be unsettled. Stock investors have depended on the Fed’s low-rates since the financial crisis to stimulate the economy and the stock market. The Standard & Poor’s 500 has climbed more than 200 percent since March 9, 2009. But it’s not just the jobs picture that threw a scare into investors Tuesday and caused the stock market to lose all the gains it had accumulated this year.

At issue is the strength of the U.S. dollar compared with the euro and Japan’s yen. Although strength sounds like a positive word, it isn’t when a U.S. company has to compete against cheaper products. The dollar now is at its strongest level, compared with the euro, since 2003. So when U.S. companies compete against European companies, or other foreign companies with the advantage of weak currencies, the U.S. businesses may lose sales or have to lower prices to compete. The loss of sales, of course, hurts profits. In addition, sales abroad have to be converted back into dollars, which means the sales are less profitable than they would have been previously.

Ultimately, the concern is that if profits suffer, investors will decide they paid too much for the stocks. Then, stocks could fall further from current levels — perhaps going through their first 10 percent correction in years. Analysts now are worried about what they call a “profit recession,” which could occur even if the U.S. economy doesn’t go into a recession. In a profit recession, companies would disappoint investors with inferior earnings. On the other hand, analysts have been downgrading expectations so sharply lately, some think companies might not have any trouble meeting the low numbers.

No matter what happens, volatility is certainly here for the near term. The Federal Reserve, while doing it’s best to project its moves, is still creating a lot of turmoil. The strong dollar isn’t helping stocks or U.S. corporations either. But I’m sure for many Americans the strengthening economy is better than a climbing stock market.