As spring arrives in the coming week, investors will debate whether it's a time to hold out hope for the market or just expect another muddy season where bad economic news leads trading.
The Fed holds a two-day meeting in the week ahead, and there is a full calendar of economic news including housing, inflation and manufacturing data.
On Monday, it will be one year since the fall of Bear Stearns, which unknown then, had foreshadowed a series of failures among financial institutions and a government rescue operation for the banking industry as a whole.
Over the weekend, G-20 finance ministers meet in Horsham, England ahead of the G-20 summit in April. OPEC, meanwhile, convenes in Vienna Sunday amid talk it will cut production.
This week was stocks' best since November. Many traders though believe it is a temporary bear market rally and will soon fade after a run of as much as 20 percent. But not everyone is gloomy, and some traders believe this at last could be the sign a bottom being formed.
"I think one has to be very careful about mistaking trading rallies for a bull market, and there's this intense desire to try to call the bottom. Our work says it's a fruitless exercise," said Richard Bernstein, Merrill Lynch chief investment strategist.
Traders say Friday's more subdued advances among stocks may be a sign the market is consolidating its gains, and options expiration in the coming week may be a further positive sign for the markets.
Financial stocks were among the star performers, gaining almost 34 percent on the week, after months of being pummeled by investors fearful that the government's rescue efforts are not working. The markets still await key details from Treasury Secretary Tim Geithner on how the government will deal with toxic debt on banks' books.
"Everybody's scared of missing the turn, so you have everybody piling into these things. (financial stocks)," said Bernstein. "The important thing to remember, and it's inevitable here if you look at the history of bubbles, there has to be massive consolidation in the financial sector. This is not what anybody wants to believe and Washington has stymied it."
Scam of the Century
Financials' 34 percent leap marked a one-week record. "From my perspective, what people still refuse to do is go back to basic fundamentals and get away from trading technicals. If you just look at the basic fundamentals of these companies, they are still in deep, deep trouble. It's our least favorite sector," Bernstein said. He does like health care, consumer staples, telecom and utilities. "We're also big bond fans," he said in reference to Treasurys.
As investors have shunned stocks in recent months, it's been a popular trade to seek out the yield and security of corporate bonds. But Bernstein says if you watch the long-term performance of corporate bonds, they have only outperformed Treasurys and stocks about a fifth of the time. "We went back to 1926, and only 20 percent of the time do investment grade bonds outperform both Treasurys and stocks. Sometimes it was in recovery periods, and sometimes it just happened by fluke," he said.
From 'Fast Money':
In the coming week, Fed Chairman Ben Bernanke will be in the spotlight. First, he has given an interview to "60 Minutes," which airs Sunday evening. This is an unusual step for a sitting Fed chairman. They usually maintain a low profile as far as media interviews go. Fed watchers believe Bernanke wants to reach and reassure a broader audience than the Fed normally reaches through financial media.
Bernanke also speaks Friday, along with FDIC Chairwoman Sheila Bair at the annual meeting of the Independent Community Bankers of America in Phoenix.
There are just a few major earnings in the coming week, including Oracle and Nike on Wednesday, and FedEx and Palm on Thursday. Another corporate story investors will be watching is General Electric's investor meeting Thursday, where GE executives will provide a detailed look at General Electric Capital.
THE BIG QUESTION ABOUT THE FED MEETING ...
As for economic news, the Fed's two-day meeting ends Wednesday afternoon with a 2:15 p.m. statement.
Goldman Sachs chief U.S. economist Jan Hatzius said the Fed is not likely to say much after its meeting. "It's sort of hard to know what to forecast now that rates are no longer an issue. As last time, the big question is do they buy Treasurys? I think they will eventually, but for this meeting, I am leaning against it," said Hatzius
Economic data in the coming week includes inflation data, with the PPI Tuesday and CPI Wednesday. The Empire State survey is reported Monday, as is industrial production and Treasury international capital flows data. The National Association of Home Builders releases its survey Monday afternoon. On Tuesday, housing starts are reported. Weekly jobless claims are reported Thursday, as is the Philadelphia Fed survey and leading indicators.
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Hatzius spoke broadly about the economy in a recent interview. Key to fixing the economy, he says, will be the plan to fix the banking system. "If we can't clean up the financial system, I think we're basically consigning ourselves to a subpar growth pace in the economy for a long period of time. I don't think the financial problems are going to prevent you from seeing better GDP numbers in the near-term if there are other forces that would promote that, such as a fiscal stimulus or reduced impact from the credit tightening, which has already taken place," said Hatzius. But longer term, the muscle of the credit markets is needed to grow the economy.
He also said it is possible a second fiscal stimulus package will be needed. "I think fiscal stimulus this year is going to work in terms of stabilizing the economy, but it's not large enough in terms of filling the output gap and reducing deflationary pressure," he said. He expects deflation to become more of a threat as unemployment grows. He now forecasts it will top out at 10 percent.
Of the global economy, he said China is showing some improvement, but the decline in Japan is surprising. "China is looking a little better recently. They seem to be helped by the fact that they have a government-run system in a period when the private-run system has been taking its lumps," he said. Traders have been eyeing China recently for signs that it may be a stimulus for the global economy, and good news from China has sometimes become good news for stock markets.
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"The data on China though is so unreliable. I have a hard time being confident. I suspect the downturn in China is probably deeper than what the numbers show," he said.
"I think the biggest surprise to me has probably been the horrendous downturn you've seen in the net saver countries. Japan is probably the most extreme. The extent of the meltdown there has really taken me by surprise," he said, noting that Japan's downturn in industrial production is twice that of the U.S.
One reason may be Japan's long dependence on exports. "I don't see a way for them to quickly reverse that. I If the global trade downturn slows, that's going to help them to some degree," he said.
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