Stocks sagged again last week in the face of renewed concerns about the European debt crisis and indications that the Federal Reserve would be less likely to engage in additional quantitative easing measures.
Friday saw the release of a disappointing labor market report for March. The data showed that payrolls grew by a less-than-expected 120,000, although the unemployment rate did fall to 8.2%, its lowest level in over three years.
The tepid pace of jobs growth in March is likely a reflection of the unseasonably warm winter weather that may have accelerated payrolls expansion in January and February. In any case, however, it does serve as a reminder that the United States is not about to transform into any sort of robust growth engine, particularly at a time when growth in most of the world is slowing. Our view continues to be that growth in the United States should come in somewhere around the 2% to 2.5% level in 2012.
For a couple of months now, we have been suggesting that the strong advance in equity prices that occurred from last fall through mid-March may mean that markets were overdue for some sort of correction or consolidation. Market action in recent weeks raises the questions of whether we are now in such a period and, if so, how deep will any pullback be.
The current pullback has, so far, been blamed on a combination of rising concern over the European debt crisis, fears over a hard landing in China and the likely absence of additional stimulus coming from the Fed. None of these developments, however, represent any sort of significant change in economic or market fundamentals and we believe that for the downturn to gain traction we would need to see some sort of deterioration.
So how extensive would any sort of correction be? Putting a specific number on near-term market forecasts is always a guessing game, but as a starting point, we can look at market trends over the past couple of years. Since the current bull market began in early 2009, we have seen many short-term corrections of around 5% to 7% that have occurred without any serious worsening of fundamentals, so that range represents a possible starting point for any sort of near-term correction.
In short, we do not believe that fundamental macro conditions have changed enough (or at all) to warrant a downgrade of our view toward equities. Beyond the short-term choppiness, our constructive outlook boils down to the fact that monetary authorities remain accommodative even while leading economic data has improved. Given the current backdrop, we believe share price turbulence is more likely to reflect the consolidation of prior gains rather than the start of some sort of large downturn. As such, we would view any sort of pullback as a potential buying opportunity, particularly for those long-term investors who remain underweight in risk assets.
Over the longer-term, we continue to believe that markets will be headed higher, but would caution that gains will be harder to come by than they were late last year and early in 2012. It is hard to deny the improvements we have seen in the global macro backdrop over the last several months. Notwithstanding March's slowdown, improvements in the labor market have suggested that the US economy has appeared to be transitioning to a more sustainable trajectory. Additionally, despite the headlines last week over a troubled Spanish debt auction that renewed concerns over the situation in Europe, policymakers do appear to be moving down the correct path.
Despite these improvements, challenges remain and we do expect to continue to see higher levels of market volatility in the coming months compared to what we saw in the first quarter of this year. The risks to our constructive outlook include a recession in Europe potentially leading to broader financial problems, worse-than expected economic data in China, a retreat in jobs market growth in the United States and a further spike in oil and gasoline prices. On balance, however, we continue to believe that the positives outweigh the negatives.
Thank you for your continued confidence in Martone Capital Management.
We welcome your comments and questions.
William A. Martone - President CLU, ChFC
Michael C. Martone - Registered Principal
William Martone is President and Senior Portfolio Manager of Martone Capital Management, Inc., which was founded in 1994. Bill has almost 40 years of experience in the financial services industry and manages portfolios for both individual investors and pension funds using multiple investment strategies. Bill is a Chartered Financial Consultant, Chartered Life Underwriter, and New York State Registered Investment Advisor. He is frequently quoted in the Westchester Journal Business News as well as other publications. Martone Capital Management was featured on CNNfn.