Stocks punished as Dow slips below 12,000

Stocks came under heavy pressure today amid a host of concerns that sent the bulls running for cover.

The Dow Jones Industrials slid 228 points to 11,985, the S&P 500 Index lost 25 points to end the day at 1,295 and the Nasdaq shed 51 points to finish at 2,701.

A larger-than-expected jump in weekly jobless claims started the day out on a sour noted, calling into question some of the recent signs showing that the labor market is beginning to heal.

Investors were also spooked by a downgrade of Spain’s sovereign debt by Moody’s, which cuts its rating one notch from Aa1 to Aa2.

Data out of China that signaled the growth in the global economy may be slowing also played a role in today’s decline.

Meanwhile, worries about the U.S. and the global economy helped to knock off over $2 dollars per barrel off the price of oil, which given what’s been happening in recent weeks, might have invited investors back into shares.

But economic concerns overshadowed any benefit that the decline in crude might have had.

Taking profits

In my view, it’s important to take a step or two back and look at what’s really gnawing at investors.

First of all economic activity has been accelerating, which is underpinning the profit picture and has been helping to fuel big gains in stocks over the past several months.

Of course, we need not discount the Fed’s implementation of another round of QE.

But the latest leg of the bull market that began in July has taken shares up over 30%, as measured by the S&P 500 Index, and turbulence is to be expected.

More specifically, looking at the catalysts to today’s decline tells me that investors needed a good excuse to bail out of stocks, and one reason was as good as another.

A 26,000 rise in weekly jobless claims to 397,000 should be taken with a grain of salt since the weekly data can be quite volatile.  Difficulties in adjusting for seasonal factors likely led to last week’s larger-than-expected decline so we are seeing some payback this week.

Still, claims have been below 400,000 in four of the past five week, which is an excellent indication that not only is the labor market is on the mend but growth is accelerating.

We’ve seen economic data before from China that suggested the global recovery was slowing down without a material impact on corporate earnings.

And Moody’s downgrade of Spain puts it in line with how S&P views the debt, per Marketwatch, so we aren’t really seeing anything new. The 3-month LIBOR rate held steady, though the TED spread did inch up to the high end of the range it’s been in since last August.

Going forward, an upward drift in either rate could be a sign of growing stress in the financial system, but at this point we’re seeing only cosmetic cracks.

Summing things up, the market has been due for a correction, and unease in the Middle East and sovereign debt worries were just what was needed to send the bulls scurrying out of the market today.

Disclaimer: The commentary provided is for informational purposes only and should not be used to time the market. Before making an investment decision, please consult your financial advisor.