Dollars and Sense: Earnings disappoint, China slows, volatility increases--but don't worry

Market madness. Monday was tax day in America, and this week was the first full week of earnings season. Wall Street couldn’t have cared less about April 15, but it paid a lot of attention to earnings. CitiGroup reported before the bell on Monday morning. In fact, we heard from a lot of financial services companies this week, including JP Morgan Chase, Goldman Sachs, U.S. Bancorp, Bank of America, and American Express. Both Bank of America and JP Morgan Chase missed expectations. Add to that news that broke on Monday that China’s GDP grew slower than expected, and Monday was the worst day of the year for the stock market. Wednesday wasn’t much better. We saw bit of a recovery on Tuesday, but from Thursday of last week to Thursday of this week, we saw a 500-point drop in the Dow.

China worries. We also got a report on Monday that China's economic growth is slowing more than expected. The report said China's GDP grew at an annual rate of 7.7 percent during the first three months of 2013. It grew at an annual rate of 7.9 percent during the last three months of 2012. So we see China’s economy is both slowing, and below forecasts of 8 percent, a number that has been driving the decision-making of global companies. So this slowdown, albeit a small one, worried investors and drove down the price of Alcoa, even though Alcoa reported last week, because of its exposure to China. Caterpillar also suffered on the China news. Both companies are among the 30 that make up the Dow Jones Industrial Average, so if a couple of Dow components move significantly in the same direction, it can move the average, and that’s what happened this week.

Volatility increases. Volatility has increased in the past few weeks. We saw three 100-point days just this week. Compare that to not a single 100-point move in the entire month of January this year. The Volatility Index, called the VIX, measures future expectations of volatility, and it is sometimes said to be the best gauge of fear in the market. It normally hovers around 12, though it can go into the 20s or even higher during a crisis or national emergency. It jumped to above 16 this week.

But will it last? So is this volatility and downward movement going to continue? Of course, no one knows for sure, but analysts see reasons not to panic. For one thing, a 100-point drop isn’t what it used to be. Historically, pundits and journalists like me track 100 point days, but when the Dow is trading at nearly 15,000, a 100-point day is only about a third of a percentage point. So these 100-point drops still make news, but they really don’t mean as much as they used to. As I sometimes jokingly say: 200 points is the new 100 points. Also, even though we’ve had a couple of negative earnings surprises, so far the vast majority of companies have met expectations. We saw positive reports from Johnson & Johnson and Coca-Cola this week. Thirdly, we’ve seen a bit of a drop in gold and silver prices in the past few weeks. That means they think the much-advertised economic apocalypse is not coming any time soon.

Good news. In fact, some of the economic news this week has actually been good, and that would be my fourth reason not to panic. Industrial production in the U.S. grew 0.4 percent last month, and that topped expectations. New claims for unemployment benefits hovered at about 350,000, which indicate moderate job growth in the economy. Economist David Crowe of the National Association of Home Builders says housing starts data for March were very positive. He predicts a 25 percent increase in homebuilding this year. So the overall message this week is don’t panic, but be prudent. In fact, that’s not bad advice for any week.