The scary drop in jobs growth will have markets fretting in the week ahead, as investors debate whether the economy is temporarily stalled or ready to hit the skids.
"There's a lot of angst...and I get that. It's real. We've slowed. No doubt. But as a stock market investor I've been looking at consolidation going on since February. The market's been flat and trending sideways since February and I would argue during that consolidation period, we've done a lot of renovation."
With just a few major data points, the focus will also be on the Fed, which winds down its quantitative easing program at the end of the month. The string of weak data, culminating with Friday's May jobs report, has Wall Street speculating the Fed could be ready to dig in and provide more stimulus to the markets, though Fed watchers, for the most part, doubt it. Fed Chairman Ben Bernanke speaks on the economy Tuesday afternoon, and a handful of other Fed officials speak throughout the week.
"I don't think we're on the cusp of any big policy change. I think the bar is very high for going back in the other direction, but it will be very interesting to see what he has to say about things. There's a big debate about whether what we're seeing right now is the beginning of a sustained slowdown or just (the effect of) short-term factors," said Stephen Stanley, chief economist at Pierpont Securities.
Friday's jobs report showed a rise in unemployment to 9.1 percent and job growth of just 54,000, about a third of economists' consensus forecast and well below April's revised. It is the latest in a series of disappointing reports that have been showing a slowdown across the economy—in housing, manufacturing, the consumer and employment.
Stanley and many other economists think the dip is temporary, and it will reverse as the effect of the Japanese earthquake-related manufacturing slowdown lessen,s and consumers adjust to now-falling gasoline prices. "I do worry though. I do think animal spirits are rather fragile, and it would not take a lot for something that started out as a temporary situation to morph into something more worrisome," Stanley said.
Stocks saw a fifth week of losses, with the Dow down 2.3 percent at 12,151, its longest weekly losing streak since July, 2004. The S&P 500 tumbled 2.3 percent to 1300, in its biggest weekly loss since last August. As stocks traded lower, the yield on the 10-year in the past week slid below the key 3 percent level and touched 2.944 percent Friday. The dollar index, meanwhile, was at 73.70, down 1.6 percent for the week, and the dollar was down 2.2 percent against the euro (1.4634).
"I think it's really going to be about psychology next week. The headlines over the weekend are going to be that there's no jobs growth. There's going to be the push-pull of 'is it transitory and a soft patch or something bigger?'" said Scott Redler of T3Live.com, who looks at the market's short-term technicals.
"Today we held 1295 (on the S&P 500), but I don't think that's the level that's going to hold for the summer. I think we could have a retest of the 1250/1255 low, from when the Japanese earthquake hit. That should be the level that holds," he said. "We're oversold now, but we're not technically oversold. We're about 5.5 percent off the highs, but there's no reason we can't be 7 to 10 percent. We have QE2 (quantitative easing) ending and so much else happening that makes me think nobody's going to step in front of this when they can come in at lower levels."
Europe will also stay in the headlines as Portugal holds weekend elections, and the European Central Bank meets on interest rates Thursday. One positive is the apparent progress being made toward a new Greek aid program and comments from the EU and IMF that Greece would receive the next payment in its existing program in July.
OPEC also meets in Vienna Wednesday, and there's some talk it could consider raising oil production to make up for lost Libyan output. John Kilduff of Again Capital doubts, however, that OPEC will change quotas or targets.
"Given that Saudi Arabia is thought to be unhappy with the U.S. over the handling of the Egyptian situation, the hawks within OPEC, such as Iran and Venezuela, are likely to have a much freer hand to fashion policy and a statement that will have the cartel monitor market conditions, seeing the market as well supplied, and not seeing any need to put more oil on the market," Kilduff notes. Oil was down 0.4 percent on the week, finishing at about $100 a barrel.
'One-timer' reasons underlie 'soft patch'
Leo Grohowski, BNY Mellon Wealth Management chief investment officer, believes now is a time for caution, but he expects the S&P 500 to be in the 1400s by year end. "We've been warning investors that for at least the next couple of months, the market is going to remain choppy. I think it would easily be back to one step forward, two steps backward for awhile. I think the markets are going to remain tentative," he said. He said he favors economically sensitive sectors like energy and technology, combined with defensive sectors, like health care.
"Stocks are clearly declining for what is no doubt a worsening outlook for economic growth. There's no doubt that the outlook for U.S. and and global economic growth is more challenged than it was a few months ago. The underlying reasons of the soft patch are sort of one-timers. They're more explainable specifically," said Grohowski, noting the supply chain disruptions from the Japanese earthquake and the jump in oil prices.
"We're still believing that there's a less than 10 percent chance of a double dip in here. Another important thing is credit markets are obviously in sound shape. That's been a big change over the last couple of years," he said.
In addition to the economy, investors have become concerned about the debt ceiling debate in Washington and the growing federal deficit. "I think if investors are digesting the news flow it's hard to get enthused about not only the markets but the state of our nation. As we talk to investors, they just have the feeling that we're not in a good place as a country right now," he said.
"There's a lot of angst...and I get that. It's real. We've slowed. No doubt. But as a stock market investor I've been looking at consolidation going on since February," said James Paulsen, chief investment strategist at Wells Capital Management. "The market's been flat and trending sideways since February and I would argue during that consolidation period, we've done a lot of renovation." He said some positives include the decline in oil and other commodities prices, improved business lending, and lower interest rates.
Like many, he believes the softness in the economy is temporary and that sub-3 percent growth will disappear as the year progresses. "I think we have a good shot at being in the (S&P) 1400s before the year is out. Whether that takes off soon or doesn't take off until September, I'm kind of indifferent about that. I can see the negatives are going up here today, but to me that's maybe a good time to buy. It could be a sloppy summer, but you could miss what I think could be some good returns for the year," he said.
Grohowski said the market has also been moving sideways during a void of corporate news, but when earnings season comes it may not be just positives.
"We do think the momentum behind earnings has peaked and I think it makes sense for investors to be factoring in a more cautious outlook in future earnings," he said.
"When the second-quarter earnings come out, I think we're going to hear some caution. Balance sheets are in great shape, but companies are going to be challenged to do much better than they were able to do last quarter on topline growth. We have a $95 estimate on S&P earnings for this year. Consensus has moved closer to $100. If we're right it's still going to be uncomfortable as the market brings down its earnings expectations."
What to Watch
Three Treasury auctions, totaling $66 billion in 3-year notes, reopened 10-year notes, and reopened 30-years will be held Tuesday through Thursday.
Data is relatively light next week. Consumer credit is reported Tuesday. The Fed's beige book on the economy is released Wednesday. Thursday's highlight is weekly jobless claims, which will be a big focus for traders. There is also international and wholesale trade data for April that day. Friday's number include import prices and a report on the Federal budget is released on Friday.
Fed speakers include Bernanke, who addresses the International Monetary Conference in Atlanta at 3:45 p.m. ET Tuesday. Treasury Secretary Tim Geithner speaks there Monday. Philadelphia Fed President Charles Plosser speaks in Helsinki Monday, and again on the economy in London Thursday. Dallas Fed President Richard Fisher gives an update on monetary policy and financial stability in New York Monday.
New York Fed President William Dudley speaks Tuesday evening in New York, and he gives a speech on the national and regional economy in Brooklyn n Friday. Kansas City Fed President Thomas Hoeing speaks in Colorado Wednesday. Fed Vice Chair Janet Yellen speaks in Cleveland on housing Thursday.
Apple kicks off its developers conference and is expected to make its iCloud offerings announcement Monday.
The annual American Society of Clinical Oncology meeting starts this weekend in Chicago and features about 4,000 papers that could impact biotech and pharma stocks.
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