Robust earnings reports and new money from fund managers may put a bounce into stocks at the start of the week, but the focus will quickly turn to economic news, especially Friday's April jobs report.
About 20 percent of the S&P 500 reports in the last big week of earnings season, including energy, media and consumer products companies. Warren Buffett meets Berkshire Hathaway shareholders Saturday, and his comments would be followed closely, as he discusses the company, investments and also former executive David Sokol's Lubrizol trades.
"Our forecast is for single digit returns this year. On New Year's Day 2012, when we look back at 2011, I think we're going to remember a pretty elevated level of volatility, as the bulls came back in spades, especially around earnings periods...The outlook still looks a little squishy."
The week's economic data features the ISM manufacturing survey, monthly auto and chain stores sales, and most importantly, the monthly jobs report. As of now, economists expect that about 190,000 jobs were added in April, less than March's 216,000.
One of the most important trends financial markets will be watching is the direction of the U.S. dollar, which has been weakening daily. Analysts expect it to continue to fall in the week ahead. At the same time, the move higher in risk assets, especially precious metals and oil, should continue. Traders point to the Fed's meeting this past Wednesday as a fresh catalyst for the move, since it appears there will be no end to its low interest rate policies for months to come.
"I think the only thing which would change this current soft-dollar environment is that next week we would have to see a very strong jobs report, which would make the market reassess (Fed Chairman Ben) Bernanke's latest commentary," said Michael Moran, Standard Chartered senior foreign exchange strategist. "That aside, he reaffirmed that easy policy is here to stay, certainly beyond June and he will keep us posted on their intentions."
Stocks closed out the month of April at three-year highs, erasing all of their late winter losses in the past week. The Dow rose to 12,810, up 2.4 percent for the week and 4 percent for the month of April, and the S&P 500 climbed to 1363, up 2 percent for the week and 2.9 percent for the month. Gold gained 8.1 percent in April to $1,556, and silver, by far the more volatile asset, jumped 28 percent for the month to $48.58 per ounce. Nymex crude rose 6.8 percent to $113.93 per barrel, and Brent crude was at $125.89, up 7.4 percent.
The dollar index fell almost 4 percent for the month, and the dollar lost 4.7 percent against the euro, which was at 1.4815 Friday. Strategists expect to see the euro breach 1.50 in the coming week. That could possibly happen Thursday, the day the European Central Bank meets on rates. The ECB is not expected to raise rates this month, but ECB president Jean Claude Trichet could signal a rate hike is coming in June.
"That could push it over 1.50," said Brian Dolan of Forex.com. "One of the other dollar negatives is an expected weakening in the pace of job creation so both the ADP (private sector payroll data) and the non-farm payrolls (Friday) are expected to come in below March's number," said Dolan. "Obviously, we've had a very nice run up in risk assets, and the month is ending with risk well bid. We'll know well by the end of the week whether the dollar decline is going to continue."
Employment-related data includes the ADP report Wednesday and weekly jobless claims Thursday. The government's April employment report is released Friday at 8:30 a.m.
Both the ISM manufacturing survey, reported Monday, and the ISM services survey, released Wednesday, also have a jobs component. Other data includes construction spending Monday, factory orders Tuesday and productivity and costs Thursday. Auto sales are reported Tuesday and chain store sales are Thursday.
Where Do Markets Head in May?
Sell in May?
As stocks continued to add to gains in April, the debate in the market turned to whether there will be a "sell in May, and go away" effect this year. Analysts and traders are clearly divided.
J.P. Morgan U.S. equities strategist Thomas Lee said the market is more likely to end flattish than to sell off in May. "There's a lot of logic in 'sell in May' right now because a lot of people are waiting to see QE2 (quantitative easing) ending, and (the second quarter) is going to have some bumps because of supply chain problems, and we do have peripheral Europe and also (budget debate) in Washington...I see the reasons behind the bumpiness, but we have inflows right now into equities, which are supporting stocks," he said.
Brian Belski, chief investment strategist at Oppenheimer Asset Management, on the other hand, has been looking for a selloff. "Our forecast is for single digit returns this year. On New Year's Day 2012, when we look back at 2011, I think we're going to remember a pretty elevated level of volatility, as the bulls came back in spades, especially around earnings periods...The outlook still looks a little squishy. The Fed came out and looked dovish. Investors are too reliant on an accommodative Fed, and they're going to miss the forest for the trees. There's still a good chance the economy is going to slow down."
As earnings came in better than expected this quarter, analysts have raised earnings estimates for the year and beyond. Lee Friday said he raised his 2011 year end target on the S&P 500 to 1475 from 1425 based on improvements in profits. He now expects to see the S&P 500 earn $105 per share for 2012, up from $102, though he kept earnings per share of $96.50 in 2011.
Belski said too many investors are chasing the trades that have worked, like metals and the weaker dollar. "A lot of people are carrying very high tracking errors in materials and energy right now," he said. Materials shares are just 3 percent of the market, but some investors have made them a large part of their holdings.
"Large cap quality is the next thing," he said, noting he prefers technology and industrials. He does not like the financial sector, which was the only S&P sector to see a negative return for April, off 0.1 percent. The best performers were defensive — health care, up 6.4 percent, followed by consumer staples, up 5 percent. Tech was up just under 3 percent.
"Tech used to be a very highly volatile sector in terms of dispersion of returns. Now it's financials," he siad.
Lee, however, believes financials will turn around, and will help drive the market's final 25 percent retracement from its March, 2009 low, along with industrials and technology.
Another 100 S&P 500 companies report earnings in the week ahead. Humana , Echostar , DISH, Massey Energy, FMC, Chesapeake Energy and Anadarko report Monday.
Pfizer , Archer Daniels, Avon, Clorox, Duke Energy, Rowan Cos, Tenet Healthare, Molson Coors, Emerson Electric, Foster Wheeler, FirstEnergy, Hyatt, MasterCard, Teva, PG&E, Legg Mason and Marathon Oil report Tuesday morning. CNBC parent company Comcast , CBS, Green Mountain Coffee, Harris, McKesson and Cephalon report after the bell.
Wednesday's earnings include Anheuser-Busch InBev , KKR , Kellogg, Marsh and McLennan, Time Warner, Devon Energy, Garmin, Computer Sciences, Statoil, RR Donelley, BMC, Whole Foods, Transocean, Williams, Prudential Financial, JDS Uniphase and Electronic Arts.
Fortune Brands , CVS Caremark , El Paso, Estee Lauder, Sara Lee, Cigna, Fortress Investments, Aigras, Huntsman, AIG, Kraft Foods, Vale, Visa, Priceline.com, EOG and Fluor report Thursday.
Friday's releases include Berkshire Hathaway after the bell, and Alcatel Lucent , Constellation Energy, Liberty Media and Washington Post, before the open that day.
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