U.S. equities moved lower on Friday as first-quarter earnings remains in focus and investors prepare for the start of a period of seasonal weakness in the market. Also weighing on sentiment was some softness in crude oil and lingering worries about a very weak GDP growth report on Thursday.
In the end, the Dow Jones Industrial Average lost 0.3%, the S&P 500 dropped 0.5%, the Nasdaq Composite lost 0.6% and the Russell 2000 ended the day 0.8% lower. Treasury bonds were little change, the dollar was under pressure, gold extended its recent strength to add 2.3% to close at a new high for the year and crude oil lost 0.1%.
Defensive utility stocks led the way with a 0.6% gain while healthcare was a laggard, down 1.5%. Amazon.com, Inc. (NASDAQ:AMZN) surged 9.6% after a big Q1 beat and strong Q2 guidance as its service business gains traction. Pandora Media Inc (NYSE:P) gained 5.2% on better-than-expected results and a 14% increase in operating earnings guidance for the year.
Hard drive makers Western Digital Corp (NASDAQ:WDC) and Seagate Technology Plc (NASDAQ:STX) were in the doghouse, down 11.3% and 19.1%, respectively, on weak forward guidance as the consumer PC market remains moribund.
The weakness in healthcare stocks was driven by a 19.4% loss in Molina Healthcare, Inc. (NYSE:MOH) after a big first-quarter earnings miss and a 30% cut to 2016 guidance on higher-than-expected medical costs for low-income and disabled plans in Texas and Ohio. High drug costs were also an issue.
Overall, the current blended S&P 500 Q1 earnings growth rate is -7.5% as seven of ten major sector groups are suffering a decline in profitability.
On the economic front, the April Michigan consumer sentiment report came in at its weakest reading since September as the expectations sub-index fell to levels not seen since September 2014. Personal spending was weak despite a strong increase in personal income as the savings rate rose to the highest since January 2013.
Heading into next week, two big catalysts loom.
The first is seasonality as May marks the start of what has historically been the stock market’s worst six months of the year. And given that it’s a presidential election year, it should be worse than usual. According to Jeff Hirsch of Trader’s Almanac fame, the Dow has lost an average of 0.8% in May during an election year since 1952.
Second, the non-farm payrolls report next Friday will refocus attention on a possible June interest rate hike from the Federal Reserve — the door to which was left open in the April policy statement released earlier in the week. As are reminder, the futures market only expects a single rate hike toward the end of the year while Fed officials, at the median, are looking for two rate hikes this year.
While the economy growth overall has been tepid at best, ongoing strength in the labor market and stabilization in energy prices suggests both jobs and inflation trends will justify another hike soon. Stocks aren’t going to like that.
On top of that, corporate earnings are falling. A combination of lower profits and tighter monetary policy should be a toxic one.
As a result, I continue to recommend investors maintain a defensive focus while traders focus on areas of weakness, such as Apple Inc. (NASDAQ:AAPL), which was slammed this week on poor earnings as iPhone sales drop for the first time ever. Edge Pro subscribers are enjoying a 265% gain in their May $107 AAPL puts.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.
