Blog : Penny Stock Week: Global Concerns Continue to Weigh on Stocks

by Ed Zwirn on March 10th, 2014

The globe continues to weigh heavily on the U.S. stock market as it opens for business this week, with everything from the latest bad news from China to the dangerous standoff in Ukraine poised to throw investors a monkey wrench.

Global risk sentiment appears to be beating a retreat Monday morning, after data released on Saturday showed an unexpected fall for China's February export figures, bringing out perennial fears of a slowdown for the world's second-largest economy.

At the same time, the situation in Ukraine offers the potential for an unsettling wildcard, with the standoff in Crimea so far a bloodless one. One thing the past week has made clear: There will be no Western military intervention in this crisis. This means that the Russian takeover of Crimea, to be soon ratified in a local referendum almost certain to pass, will become a fait accompli, perhaps a welcome outcome for the sake of world peace but an unsettling precedent, given that Ukraine voluntarily gave up its nuclear arsenal shortly after independence from the U.S.S.R. in exchange for border guarantees from the U.S. and Russia. 

On the other hand, given the unsettling situation, the U.S. market may be sitting in the proverbial catbird seat, assuming investors continue the flight seen last week from international chaos for the relative shelter of domestic shares, a flight which propelled the broad market, particularly penny stocks, to new highs.

Last week saw the market continue to build on recent gains, with the Dow Jones Industrial Average closing Friday at 16,452.72, up 0.8% from the previous week's 16,321.71. The broader NASDAQ Composite rose 0.7%.

At the same time smaller stocks, including penny stocks, continued to outperform, with the small-cap Russell 2000 up 1.7% after hitting another all-time record on Tuesday, scoring its fourth consecutive weekly gain.

Propelling these gains in part has been a pronounced flight of capital from overseas markets. The week which ended Wednesday saw $9.6 billion pour into U.S. equity funds, while emerging markets bled cash for the 19th consecutive week, according to EPFR Global. Significantly, institutional investors accounted for 90% of all the money which went into developed markets and two-thirds of the redemptions from emerging markets funds.

The "safe haven" status enjoyed by U.S. markets last week was buttressed by a set of basically benign economic releases:

-- On Monday morning, we learned that U.S. consumer spending continued to outpace their incomes in January, with personal income rising 0.3% as expected, following December's flatline reading, while personal spending rose by a greater-than-expected 0.4%, the same rate of increase seen the prior month.

-- Later Monday morning, the market received relatively pleasant news from the construction sector, with the report of a better-than-expected 0.1% rise for January construction spending. In addition, the figure for December was revised to show an increase of 1.5%, up from the initially estimated 0.1% rise.

-- Monday afternoon brought news of a motor vehicle sector little changed on the month. Auto sales for February totaled 5.2 million, up from January's 5.1 million, while truck sales were unchanged at 7 million.

-- Thursday's factory orders report wins the Train Wreck of the Week award. The consensus had called for a 0.5% January decline, following December's 1.5% fall. Instead, factory orders were down by a worse-than-expected 0.7% and, to make matters worse, revised figures indicated that December's decline, at 2%, had been more pronounced than initially reported.

-- On the other hand, a great sigh of relief must have been audible on trading floors when Friday's February jobs numbers came out. Coming at the end of an economic release-packed week, the news that 175,000 people landed jobs last month not only beat the consensus estimate of 163,000, it provided a reassurance that the jobs market slowdown seen over the past several months may be starting to reverse itself.

Revisions made the slowdown seen in December and January a tad less severe, with employment, on net, having risen an additional 25,000 during those two months. Including the February results, monthly job gains over the past three months have averaged 129,000. During the 12 months prior to February, employment growth averaged 189,000 per month.

The unemployment rate, which had been expected to remain unchanged at 6.6%, in fact rose slightly, to 6.7%. There was good news in the form of a higher-than-expected 0.4% rise in hourly earnings, following January's 0.2% increase. The average workweek ticked down to 34.2 hours, down from a downwardly revised 34.3 hours.

Looking ahead this week:

-- Thursday's retail sales report is expected to show a 0.2% rise for February, following January's 0.4% decline. Excluding the auto sector, the increase is
still expected to come in at 0.2%, following January's flat reading.

-- Look for Friday morning's producer price index release to show little movement. The consensus calls for a February PPI rise of 0.2%, the same increase seen in January. The less volatile "core" figure, which excludes food and energy, is expected to rise even less, by 0.1%, reflecting a lack of any monetary inflationary pressure.