2 Reasons Stocks Stumbled Last Week

While there weren't any clear catalysts for last week's stumble, here are two reasons that could help to explain the fall.

Apr 12, 2014 at 3:00PM


Over the past three days, the S&P 500 (SNPINDEX:^GSPC) tumbled more than 3%, leaving analysts and commentators wondering whether this is the beginning of a bull market.

At first, there seemed to be few catalysts to spark the decline. On Tuesday, Alcoa (NYSE:AA) released earnings for the three months ended March 31. Although the aluminum giant's fortunes have waned in recent years, it's still often considered an informal bellwether for the broader economy, as it was formerly the first company on the Dow Jones Industrial Average to report results each quarter.

With this in mind, it would seem as if things are headed in the right direction, as the company announced better-than-expected net income, albeit on lower revenue. "Transformation is accelerating," said CEO Klaus Klienfeld. "We're powering growth in our value-add business and aggressively reshaping our commodity business."

Adding to the good news was an upbeat jobs report on Thursday. According to the Labor Department, initial claims for unemployment benefits dropped 32,000 to a seasonally adjusted level of 300,000 in the week ended April 5. It was the lowest reading in nearly seven years.

The good news left analysts scrambling to explain Thursday's tumble, in which the major stock indexes dropped 2%. The most common explanation seems to be that investors have finally decided that the market's multi-year rally has gone too far.

"Clearly investors are nervous about high-flying momentum stocks," an investment strategist told CNBC. "There is a rethink on whether better earnings and economic data will support a resumption of the momentum that was driving biotechnology and higher-flying technology stocks earlier in the year."

Further fueling a decline on Friday was JPMorgan Chase's (NYSE:JPM) disappointing earnings report. Net income at the nation's largest bank by assets fell by 18.5% on a year-over-year basis because of elevated legal expenses and disappointing revenue from trading and mortgage operations.

By contrast, Wells Fargo (NYSE:WFC), the fourth largest lender by assets, announced yet another quarter of record earnings per share. It was the 17th consecutive quarter of EPS growth at the California-based bank, and news of the performance sent its stock up by 1.5% in afternoon trading yesterday.

When all was said and done, in turn, last week's drop appears to have been much more psychologically driven than anything else, as whatever bad news made its way into the market was coupled with evidence for optimism.

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John Maxfield has no position in any stocks mentioned. The Motley Fool owns shares of JPMorgan Chase and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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