U.S. equities moved lower on Friday as first-quarter earnings remain in focus and investors prepare for the start of a period of seasonal weakness in the market. This time of year, it's impossible not to hear about "sell in May and go away." 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 industrials index closed down on Friday by 57 points at 17,773 -- continuing a long sideways crawl going back to 2014 that coincided with both the end of the Federal Reserve's QE3 bond-buying program and a peak in corporate profits.
Overall, the current blended S&P 500 first-quarter earnings growth rate is -7.6 percent as seven of 10 major sector groups are suffering a decline in profitability, with more than 60 percent of the companies in the S&P 500 reporting results.
On the economic front, the April Michigan consumer sentiment report came in at its weakest reading since September as the expectations subindex fell to levels not seen since September 2014. Consumer spending was weak despite a strong 0.4 percent increase in personal income as the savings rate rose to the highest since January 2013. This reinforces the notion of fragility conveyed by the disappointing 0.5 percent growth of the U.S. economy in the first quarter (chart above).
This week, two big catalysts loom.
The first is seasonality -- with May marking 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 in 2016. According to Jeff Hirsch of Trader's Almanac fame, the Dow has lost an average of 0.8 percent in May during an election year since 1952.
Second, the nonfarm payrolls report due on Friday will refocus attention on a possible June interest rate hike from the Federal Reserve -- the door to which the Fed left open in its April policy statement. As are reminder, the futures market expects only 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 economic growth overall has been tepid at best, ongoing strength in the labor market and stabilization in energy prices suggest that jobs and inflation trends will justify another hike soon. Stocks aren't going to like that.
On top of that, corporate earnings keep falling. A combination of lower profits, slower growth and the prospect of tighter monetary policy could be toxic as the summer doldrums approach.