Awful Earnings Hit the Dow While an Awful Jobs Report Pushes Bonds Up

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

The Dow Jones Industrial Average (DJINDICES: ^DJI  ) is down after a weak start to earnings season, which Alcoa (NYSE: AA  ) kicked off last night. The bond market, meanwhile, jumped today after a weaker-than-expected jobs report.

As of 1:30 p.m. EST, the Dow was down 32 points to 16,412. The S&P 500 (SNPINDEX: ^GSPC  ) was down less than one point to 1,837. Bond prices rose, pushing the yield on the 10-year Treasury down to 2.87%.

Aluminum giant Alcoa started earning season with an earnings release title that is pretty amazing: "Alcoa Reports Strong Full-Year 2013 Profit Up from 2012, Excluding Special Items." Special items were roughly $2.4 billion in the fourth quarter, leading to a full-year loss of $2.3 billion. If you ignore that loss the company earned $357 million in 2013. 

The aluminum company reported a "kitchen sink" earnings report with numerous write-offs totaling $1.7 billion, as well as a $384 million settlement with regulators over violations of the Foreign Corrupt Practices Act. The company reported a total loss of $2.3 billion ($2.19 per share) for the fourth quarter. Excluding one-time items, the company reported net income of $40 million, or $0.04 per share, and revenue of $5.6 billion. Both were below analysts' estimates, not a good start for the earnings season to which Alcoa is a bellwether.While it is true that the $1.7 billion in writedowns were a noncash charge, this just means the company is finally acknowledging terrible acquisitions it made in the past.

Economy and bond market
There were two U.S. economic releases today.

Report

Period

Result

Previous

Nonfarm payrolls

December

74,000

241,000

Unemployment rate

December

6.7%

7%

Wholesale inventories

November

0.5%

1.3%

The Department of Labor this morning delivered its worst jobs report since January 2011. The economy added just 74,000 jobs in December. This is in stark contrast to Wednesday's employment report from ADP which showed the private sector added 238,000 jobs last month.

So is it as bad as it appears? Who knows. This is just the first Labor Department estimate of December jobs. While people are panicking over the terrible report, keep in mind that to get the actual jobs created number will be adjusted seven more times. For example, November jobs were originally reported at 203,000 and were revised upward today by 38,000 to 241,000. December is also a unusual month in that it is filled with holidays, and there were numerous instances of terrible weather which affect both estimates and people's ability to get jobs.

In 2013, job growth averaged 182,000 per month, which includes the terrible first estimate for December. That's in line with 2012's average of 183,000 and we can still expect the December numbers to be revised. It seems the bond market is taking the jobs report at face value and assuming that this will delay the Federal Reserve's tapering of asset purchases. The yield on the 10-year Treasury fell by 10 basis points today as prices rose on Treasury bonds.

What's an investor to do?
I continue to believe the stock market is overvalued and that earnings look cyclically high. That said, predicting where the broad market will go in the short term is a game for fools (with a lowercase "F"). Stocks can always get more overvalued. When things get frothy, it's worthwhile to build up some cash on the side for when prices inevitably fall.

The Motley Fool has always taught that Foolish (capital "F") investors don't invest in the broad market. We invest in great companies at good prices, continue to educate ourselves, and hold on to our great companies over the long term. The market will fluctuate (sometimes massively), but great companies will win out over the long run.

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