Weak Jobs Report, Earnings Season Could Test Market Bull
Stocks come off their worst week of the new year with investors wondering if the selloff is the start of something bigger, or just a pause.
The disappointing March employment report, released when the market was closed Friday, adds fuel to that debate, and could send stocks lower on Monday’s opening bell. But in a perverse twist of market logic, the number may be seen as a positive for stocks if investors believe it will result in a new round of Fed easing.
The economy added just 120,000 nonfarm payrolls in March, well below the 203,000 expected by economists. Bonds rallied, and yields moved lower. Stock index futures, open briefly Friday, fell sharply.
“Any kind of number like that will do it,” said Wells Capital investment strategist James Paulsen. “But we’ll see what investors do. I think there’s a lot of people that missed out and they don’t want to miss out further, and on any pullback they’ll be buying. Even with this one report, there’s a lot more good things going on in this recovery than they’re used to be.”
If the March report met expectations, it would have been the first four month streak of 200,000 plus jobs since 1999. “My point is it’s quite a feat to string a number of those together without a statistical fluke month. In other words, it would have been quite a big deal if we had gotten another 200,000-plus number,” Paulsen said.
The sluggish job growth immediately set traders buzzing about the potential for more quantitative easing, during Friday’s holiday-shortened bond-market session. The Federal Reserve disappointed investors earlier in the week when March meeting minutes showed members had no resolve to carry out a new round of easing. Stocks and commodities sold off, and bond prices and the dollar moved higher.
The equity market will have its first chance to react to Friday’s March jobs report Monday morning, when the markets reopen after the long Easter weekend.
The Dow was down 1.2 percent to 13,060 in the past week, and the S&P 500 was down 0.7 percent at 1398.
Now that the major jobs report is out of the way, the week ahead brings more data and new challenges.
“The next big story is really earnings season which kicks off next week,” said Andrew Burkly, market strategist with Brown Brothers Harriman. “It’s all about top line at this point because margins have peaked for the cycle. It looks like margins pretty much peaked in the third quarter.”
There are only a few earnings reports in the coming week, led by Alcoa which is first big name to report, after Tuesday’s closing bell. Among the handful of others are Google on Thursday, and J.P. Morgan and Wells Fargo on Friday.
Important economic reports in the coming week include trade and inflation data, which should show the continuing impact of rising oil and gasoline prices. On Tuesday through Thursday, the Treasury auctions $74 billion in notes and bonds, including 10s and 30-year bonds.
Much attention will also be paid to Fed Chairman Ben Bernanke, who gives two speeches. There are also a half dozen other Fed officials speaking in the coming week.
Deutsche Bank chief U.S. economist Joseph LaVorgna said the Fed speeches should be important. “A plethora of Fed speak should clarify the Fed’s thinking on the economic outlook and perhaps the fate of Operation Twist following a lukewarm March jobs report. Chairman Bernanke speaks on Monday evening at a Fed conference; given the topic of his speech is “Fostering Financial Stability,” he may add remarks on the latest employment news,” wrote LaVorgna in a note.
“Operation twist” is the Fed program that expires in June, and is viewed as a “QE light” because the Fed buys longer-dated Treasurys, and sells the same amount of short-dated securities. In its past QE programs, it has bought securities, ballooning its balance sheet by hundreds of billions of dollars.
Earnings are expected to grow by just under one percent for the first quarter, the slowest rate in three years. The Standard & Poor’s Capital IQ survey, forecasts that earnings will have grown 0.93 percent in the first quarter.
Even so, Burkly said he expects earnings surprises to improve in the first quarter, after dropping off in the fourth quarter. “We think they’re going to tick up because expectations have come down a lot,” he said.
Burkly said the S&P 500, minus financials and utilities, saw margins peak at about 8.8 percent in the third quarter. They then dropped to 8.3 in the fourth quarter. “It now looks like it’s going to be 8.1,” said Burkly. “In any business cycle, when operating margins roll over for a couple quarters, it’s typically that they won’t come back and make a new high.”
However, peaking margins does not mean an end to stock-market gains. Burkly said that a year after margins peak, the market is usually up 7 to 7.5 percent.
“Valuations are reasonable enough to sustain the market at the current level even if earnings are zero,” said Jack Ablin, CIO of Harris Private Bank. “So, anything we can get to the positive side should help pull stocks positively higher … the easy comparison are now behind us. And me included, a lot of us were hoping for a strong jobs number to set us on the right path.”
Ablin said it’s possible the jobs data and down market of the past week could set off a pullback that market analysts have been looking for. The S&P 500 has increased more than 30 percent since October, without a correction or even significant pull back. Most strategists expect any sell off to be much more shallow than last year’s more than 20 percent sell off.
“I think the other concerns obviously is the seasonality,” Ablin said. Analysts have been pointing to the fact that in the past two years, the market has hit its highs in April, and investors really did “sell in May” and go away.
“I still think there’s a little more room to eke out some incremental gains, but we need earnings. That’s really the bottom line, both figuratively and literally,” he said.
Ablin has been particularly concerned about one group – the financials. He said they do not deserve the 20 percent run they’ve had since the start of the year. “They’re certainly running in conflict with interest rates, so we’ll see who’s right,” he said.
Paulsen, too, said it’s possible the pullback is underway.
“Certainly, you’re going to get a pullback at some point but I do kind of wonder if the pullback might not be until later in the year. There’s so much “sell in May and go away” talk. I just wonder if stocks keep running ahead until rates go up, and we struggle sometime in the second half of the year. It seems too consensus now,” said Paulsen.
Burkly, in an interview earlier in the week, said he is watching for a lack of leadership, and he agrees there could be a pullback. “If you look at net new 52-week highs or small cap participation, small caps have been lagging. The number of stocks reaching 52-week highs is diminishing. It doesn’t tell you anything imminent. It just tells you you’re getting a little tired in terms of the advance,” said Burkly.
What to Watch
0715 pm Fed Chairman Ben Bernanke speaks at Atlanta Fed conference on financial stability
Earnings: Alcoa, SuperValu, Chevron (interim)
0730 am NFIB small business survey
1000 am Wholesale trade
1000 am JOLTS
1245 pm Atlanta Fed President Dennis Lockhart at Atlanta Fed conference
0100 pm $32 billion 3-year note auction
0115 pm Minneapolis Fed President Narayana Kocherlakota on the outlook
0830 am Import prices
0930 am Kansas City Fed President Esther George on financial stability
1030 am Boston Fed President Eric Rosengren on money market funds at Atlanta Fed conference
1030 am EIA oil inventories
1200 pm Atlanta Fed President Lockhart closing remarks at Atlanta Fed conference
0100 pm $29 billion 10-year note auction
0200 pm Federal budget
0200 pm Beige book
0500 pm St. Louis Fed President James Bullard
Earnings: Google, Rite-Aid, LDK Solar, Fastenal
0830 am Initial claims
0830 am PPI
0830 am International trade
1030 am EIA natural gas inventories
1230 pm Philadelphia Fed President Charles Plosser on economic outlook
0100 pm $13 billion 30-year bond auction
0100 pm Minneapolis Fed President Kocherlakota on the outlook
Earnings: J.P. Morgan, Wells Fargo, Infosys, Shaw Communications
0830 am CPI
0955 am Consumer sentiment
0100 pm Fed Chairman Bernanke keynote at Century Foundation Conference: Rethinking Finance
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