The Decline in Stock Prices May Be Short-Lived

This week, investors on Wall Street will focus on the employment report in the U.S., which could influence the Federal Reserve’s decisions on monetary policy and significantly steer the market.

The Dow Jones index weakened by 1.2 percent last week, to 15,115 points, while the S&P 500 slipped 1.1 percent, to 1,630 points, and the Nasdaq index fell 0.1 percent, to 3,455 points. This marked the second consecutive week of declining stock prices, a trend not seen since November of last year.

Market instability is a result of investors’ fears that the Fed will abandon its accommodative monetary policy, which has kept interest rates at record lows since 2008, fueling a surge in stock prices to the highest levels in history.

Since about ten days ago, when Federal Reserve Chairman Ben Bernanke stated that decisions regarding stimulus monetary programs could be made at one of the upcoming Fed meetings, stock prices have been falling while bond yields have been rising.

“It is clear that investors are afraid the Fed will start reducing the amounts for bond purchases. If that happens, those in the market for cheap money will likely exit quickly,” says Quincy Krosby, an analyst at Prudential Financial.

The beginning of the withdrawal of these investors from the market could occur as early as the end of this week when the employment data in the U.S. is released.

In a Reuters survey, analysts estimate that in May, the number of employed increased by 168,000, nearly the same as in April. Meanwhile, the unemployment rate could remain unchanged at 7.5 percent.

Last year, the Fed indicated that it would keep interest rates at record lows until the unemployment rate falls to 6.5 percent. For that rate to decrease significantly, more than 200,000 new jobs would need to be created monthly in the coming months, analysts say.

“If the employment data is better than expected, it could heighten investors’ fears of a tightening of the Fed’s monetary policy, which would negatively impact the market,” says Mark Luschini, a strategist at Janney Montgomery Scott.

However, the decline in stock prices may be short-lived as good labor market data would indicate that the economy is recovering, which is positive for the market in the long term, says Luschini.

This week, numerous other data from the U.S. economy will also be released, but all will serve only as a prelude to the employment report, which will be published on Friday.