Week Ended April 5, 2013

Stocks fall on economic worries

The major indexes retreated from the record highs they established the previous week as a series of poor economic signals suggested another springtime slowdown in the recovery might be on the way. Companies will begin reporting first-quarter earnings next week, but a lack of corporate news in the meantime left investors focusing on the economy.

Weakening labor market proves chief concern

The primary driver of economic woes was the labor market. On Wednesday, stocks plunged sharply following a report on job growth from payroll processing firm ADP that fell short of expectations. Concerns were augmented a bit by Thursday's weekly unemployment claims report, which showed its third consecutive rise. The deciding blow came on Friday, however, when the Labor Department reported a gain of only 88,000 jobs in March, the lowest since last June. The unemployment rate fell slightly to a new four-year low of 7.6%, but that was mainly due to workers leaving the labor force.

T. Rowe Price economists see short-term payback

T. Rowe Price economists did not anticipate the extent of the drop in payroll gains, but they were not surprised to see a short-term payback for outsized gains in recent months. Over the past year, payrolls have grown at an average pace of 170,000 per month, suggesting that February's increase of 268,000 (revised upward in the latest report) was unsustainable. They also note that the report indicated a longer average workweek resulting in a 0.4% rise in aggregate wage income.

Unfortunately, the job market was not the only cloud on the horizon. Stocks moved lower to start the week following news that factory activity had grown more slowly in March, while a related indicator released on Wednesday pointed to a similar slowdown in the services sector. While markets have largely taken the recent sequestration cuts to federal spending in stride, the data added to worries that the economy might be slowing as government contractors cut back on orders and furloughed workers reduce spending.

Easy money likely to continue supporting stock prices alongside other factors

Should it continue, a slowdown in employment gains and economic growth might encourage the Federal Reserve to keep its asset purchase program in place longer than expected; the Fed has already committed itself to keep short-term interest near 0% as long as the unemployment rate remains above 6.5% and inflation appears likely to stay below 2.5%. While focused on company fundamentals, T. Rowe Price managers note that the Fed's aggressive policy has been one factor boosting markets in recent months. More significantly, corporate balance sheets are in outstanding condition, and recent tax hikes on capital gains and dividend income were not as significant as some had anticipated. We believe that stock valuations are still reasonable relative to fixed income and cash alternatives.

U.S. Stocks1

Index2

Friday's Close

Week's Change

% Change
Year-to-Date

DJIA

14565.02

-13.52

11.15%

S&P 500

1553.27

-15.92

8.91%

NASDAQ Composite

3203.86

-63.66

6.11%

S&P MidCap 400

1124.08

-30.58

10.16%

Russell 2000

922.94

-30.29

8.66%

This chart is for illustrative purposes only and does not represent the performance of any specific security. Past performance cannot guarantee future results.

1Source of data Reuters, obtained through Yahoo! Finance Closing data as of 4 p.m. ET.

2The Dow Jones Industrial Average and the Standard & Poor's 500 Stock Index of blue chip stocks, the Standard & Poor's MidCap 400 Index, and the Russell 2000 Index are unmanaged indexes representing various segments by market capitalization of the U.S. equity markets. The Nasdaq Composite is an unmanaged index representing the companies traded on the Nasdaq stock market and the National Market System.