Dow Jones Erases 2012 Gains – What's Next?

Email
    Text size
The "sell in May and go away" approach panned out this year as the month was not merry for markets.

U.S. equities experienced a steep drop during May, enduring the worst monthly declines in two years. The Dow Jones Industrial Average fell 6.2%.

A good part of May's decline was blamed on the ongoing European sovereign debt crisis that has swelled of late and shattered investors' confidence. But things on the home front are far from ideal.

The flight from stocks flowed into the first day of June. The Dow plunged 274 points Friday, erasing all of the year's gains. Fueling Friday's fall was May's dreadful U.S. jobs report, which showed employers added just a trifling 69,000 in payrolls, less than half the expected 150,000.

The Standard & Poor's 500 Index and Nasdaq both plummeted more than 2%. The Nasdaq has given back more than 10% since its late-March peak.

Traders consider a 10% drop to be a market correction. Meanwhile, the S&P 500 is just a mere point above correction territory.

Just 17 of the 500 companies in the S&P index ended higher on Friday.

"The big worry now is that this economic slowdown is widening and accelerating," Sam Stovall, chief equity strategist at market research firm S&P Capital IQ, told the Associated Press.

U.S. Economic Data Dashes Confidence

Friday's ominous U.S. job market report raised a red flag that the encouraging employment gains during the first two months of 2012 were just a temporary reprieve. Investors fled world markets worried that any kind of U.S. economic recovery is far off.

Safe haven gold glistened on hopes of more government intervention, like a third round of quantitative easing. The yellow metal gained nearly $60 intraday before settling the session up $57.90 to $1,622.10 a troy ounce. Other metals rallied as well.

The economic data made jittery investors more nervous over whether or not U.S. stocks are indeed "the best house in a bad neighborhood," Alec Young, an equity strategist at Standard & Poor's, told CNN Money.

While Young continues to view U.S. stocks as a reasonably safe bet, he noted that the latest reports on economic activity in China and other major economies suggest "the problems in Europe are beginning to affect the entire planet."

"It's like you're fighting a war on two fronts: in Europe and at home," Young added.

Dow Jones: What's Ahead

The Federal Reserve is ready and willing to intervene in the U.S. economy to stave off a recession. The central bank is expected to intercede if economic conditions continue to deteriorate.

This may invoke enough confidence to give the markets a floor, although many nervous investors will park on the sidelines if the Dow keeps falling.

Ryan Detrick, senior technical analyst at Schaffer's Investment Research, told CNN Money, "This is a relatively normal correction in the face of a very strong market rally earlier this year." Detrick noted that equities increased about 30% from the lows reached in October through the first quarter of 2012.

If history is a guide, he maintains, stocks have further to fall.

U.S. stocks started strong in 2011, then dipped some 18% during the summer on the unease over Europe's woes and hints of a slowdown in the United States.

"We've seen rough summers before," said Detrick.

The DJIA was down just 11 points by 11 a.m. Monday. The crazy, but certainly not lazy, Dow days of summer are upon us.

Related Articles and News: