The challenge for markets in the week ahead will be whether to ride a wave of better economic and earnings news or give in to a growing list of worries.
Stocks come off their worst week since January, with a 4 percent decline in the financial sector leading the way. The Dow was down 1.75 percent for the week, but was 1.5 percent higher in April, ending at 11,008. The S&P 500 was down 2.5 percent for the week, but finished April with a 1.5 percent gain at 1186.
"There's just too much headline risk," said Tim Smalls of Execution LLC on Friday afternoon. "You know every Sunday show is going to be about the oil spill. It's going to be about Greece. It's going to be about Goldman Sachs, and if you're sitting there, and you had a good month, there's no reason not to take some off."
Nearly 20 percent of the S&P 500 report earnings in the week ahead, including Merck, Pfizer and Time Warner. A heavy calendar of important economic reports are capped Friday by the much anticipated April jobs report. Over the weekend, the EU and IMF were expected to announce a Greek bail out package, which should calm anxious markets. On Thursday, the British election should hopefully determine which party will dominate.
Meanwhile, an oil spill from a BP well in the Gulf of Mexico continues to prove more hazardous than expected. It threatens the Gulf coastline and its economy, as well as raises longer term questions about offshore drilling.
Goldman Sachs continues to draw fire, and the revelation of a Justice Department inquiry into the firm, put a major dent in its stock price Friday. Goldman is already the target of an SEC civil suit, which claims the firm failed to disclose that it structured a financial product for one client, who was short, to the detriment of others. Just the prospect of a potential criminal investigation sent chills through the stock market Friday and knocked down the financial sector by 2.4 percent.
Financial regulatory reform will be a highlight in the week ahead, as the Senate starts voting Tuesday on the first of a long list of amendments to its bill. The Senate, in the past week, agreed to debate regulatory reform, an event that also weighed on the financial sector. The Financial Crisis Inquiry Commission will also keep Wall Street's mistakes under the spotlight, as former executives form Bear Stearns testify Wednesday. On Thursday, Treasury Secretary Tim Geithner testifies, as does former Treasry Secretary Hank Paulsen.
Always closely watched, Warren Buffett speaks on Saturday to what could be 40,000 shareholders of his Berkshire Hathaway.
Sell in May?
Binky Chadha, chief equities strategist at Deutsche Bank, said the old adage "sell in May and go away" is probably not going to prove true this year. "I think it's really much more to do with the fundamentals. Since March of last year, most of all of the old folk lore has not worked. I think the cycle where we are—whether it's going to deliver, whether it's sustainable—all of those considerations dwarf those other factors," he said.
Chadha this past week actually raised his already higher than average target on the S&P 500 for 2010. He pushed it to 1375 from 1325, noting that earnings continue to beat solidly for a fifth quarter in a row. He also says analysts have not been moving estimates that much, so there is a built in environment for upgrades and surprises.
"Basically since March of last year, we've been in a battle between improving fundamentals and fear. Fear includes all the structural concerns everyone has about the recovery—Greece, policy risk ... our call has basically been that the fundamentals will win out over the fear," he said.
Chadha said S&P earnings per share have been coming in 20 percent above consensus, and the contribution of sales beats are rising. The largest beats have been in financial services, up 38 percent but the beats in one of his favorite sector's consumer discretionary, are also large, up 15 percent. He also raised his S&P EPS target to $84.60 from $80.80 for 2010 and to $95 from $93 in 2011. His S&P target is 1550 for 2011.
Economic Data and Earnings Roundup
In the coming week, economists will focus on the strength of the manufacturing economy and the consumer.
Car sales are released Monday and are expected to show sales running at a rate of 11.5 million SAAR. ISM manufacturing data is also released Monday, and will reveal whether the manufacturing sector continues to strengthen, as well as its hiring. Factory orders are Tuesday and ISM nonmanufacturing data, another clue for job growth, is released Wednesday.
Personal income and spending is reported Monday, and chain stores' monthly sales on Thursday will show whether the consumer continues to rebound.
But the big one is the employment report, expected to show job gains of 175,000 and an unemployment rate of 9.7 percent. Weekly jobless claims are Thursday, and ADP's private sector employment report is released Wednesday.
Pierpont Securities chief economist Steve Stanley said he expects to see 160,000 non-farm payrolls added for April, close to March's number. He said he expects the contribution from the census to be about 75,000 while some others expect that number to be 100,000 or more. Stanley said he expects weekly jobless claims to continue to creep lower.
Economists have noted the weekly number has still not yet broken below 400,000, the signal to some that the economy is creating jobs. Stanley said it may be that the structure of unemployment insurance in this economic downturn is partially responsible for the slow downtrend, and that the 400,000 figure may not be as relevant as it had been. "Both the duration and generosity have been ratcheted up more than they have been before," he said.
The dollar gained 1.5 percent against the euro in April, as the euro wilted under Europe's sovereign debt concerns. In the past week, the dollar gained another half percent. The euro was at $1.3314 Friday.
Brown Brothers Harriman currency strategist Win Thin said the euro, which has been heavily shorted, may see a bounce higher early in the week on short covering after the Greece announcement.
Robert Sinche, chief investment strategist at Lily Pond Capital, said Europe's problems will be pushed aside by markets, if the Greek debt crisis is resolved for the time being. "Europe is a little bit of a dark cloud, but then again, more of a headline dark cloud than an economic reality," he said.
China is worth watching for the next couple of weeks. "China has gone off the radar a bit and I've actually thought for a while that mid May was a time for them to take some action on their currency.. In this quiet time, keep an eye on China for the next two Mondays," he said.
So far, 78 percent of the 337 S&P 500 companies that reported earnings have come in above expectations this quarter. Of the 337 companies, 66 percent have beaten their revenue estimates.
Monday's reports include Clorox, CNA Financial, Dendreon, Nicor, Lowes and Sysco, EOG Resources, Anadarko, FMC, McKesson and Pitney Bowes. Tuesday's reports include Archer-Daniels, Baker Hughes, CVS Caremark, Beazer Homes, Checkpoint Systems, El Paso, Fresh DelMonte, Martin Marietta Materials, Pfizer , Merck , Marathon Oil, NYSE Euronext and Marsh and McLennan. News Corp, Teco and Pioneer Natural report after Tuesday's bell.
Allegheny Energy, Calpine, Devon Energy, Clean Harbors, Foster Wheeler, Garmin, Intercontinental Exchange, Pulte Group, Time Warner and Williams Cos report Wednesday.
CBS, BMC, XTO, JDS Uniphase and Murphy Oil report after the bell that day. On Thursday, AXA, Airgas, Cigna, Dr. Pepper Snapple, DirecTV, Sara Lee, Precision Castparts, PPL, and MGM Mirage. After the bell, Kraft and Activision Blizzard report.
Friday's reports include Berkshire Hathaway, AES, CF Industries, Edison, Liberty Media, PG&E and Washington Post.
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