There's a watchfulness in the stock market that's likely to translate into tentative and choppy trading as the corporate earnings season gets underway.
But there is also a growing sense that stocks may have seen the lows of the year, as investors hold onto a level of comfort after the Fed's actions to revive credit markets and its rescue of Bear Stearns. That, of course, does not mean we won't see those lows again.
In the week ahead, almost more important than the economic data will be the start of the corporate earnings season and the psychology around it. The overwhelming sense from traders is that the numbers may be worse than expected, particularly where the financial companies are concerned, but the weak dollar should continue to fire up results from companies that have international exposure.
Earnings season launches with two big names — Alcoa Monday and General Electric Friday. The big flood of reports, including earnings from big banks, begins the following week.
The G-7 meets in Washington Friday. The big question heading into that meeting is how much concern finance ministers will show about the weakness of the dollar.
The dollar was slightly higher against the Euro this past week, rising almost a half percent to $1.5731 per Euro, but it has fallen 7.2 percent against the Euro since the start of the year. The greenback gained 2.4 percent against the yen.
Stocks finished the past week with solid gains. The Dow was up 3.22 percent for the week while the Nasdaq was up more than 4.8 percent The S&P 500 rose 4.2 percent. The top S&P sectors were materials, up 6.6 percent, and financials up 6.59 percent. Consumer staples and healthcare were among the worst performers but were still higher on the week, with gains of more than 1 percent.
The two-year Treasury fell 10/32 in the past week, to yield 1.834 percent, while the 10-year fell 5/32, taking its yield to 3.483 percent.
Kevin Ferry of Cronus Futures Management said the Fed's efforts are showing some results, if you look at the credit markets. He said spreads between Treasurys and Eurodollar futures (i.e. LIBOR) have been steadily narrowing in recent sessions.
"The barometer of fear remains stable, and that's critical. when you talk about the Federal Reserve getting involved in the market place. Their report card is the judgment of getting fear spreads back in." He said "getting spreads in is critical to the foundation of market psychology."
As the worries about credit markets ease, the focus turns to the economy and what the damage may be. This is why the story in this quarter's earnings will be so important.
"This is going to boil down to what really happened in the real economy outside of the credit system. That's why we think the Fed is signaling that they're done so they can save their bullets for the real economy," said Ferry, a CNBC contributor.
CNBC's Rick Santelli says even though the markets are watching data, that is taking a back seat to other issues. "There are two things to think about. If the data stays bad, there's concern it will chip away at the confidence, and the safety net, the Fed put in place with the Bear bailout...and since the government stepped in to save Bear Stearns, there's a perception that it will be there to help whatever market is in trouble."
So now the markets believe the government will ultimately step in to buy mortgages, said Santelli.
With Dow component Alcoa's report Monday, Wall Street (and CNBC) mark the official start of the first-quarter reporting season. (The official end of the season is with Wal-mart's report.)
In addition to Alcoa and CNBC parent company GE, three retailers — Circuit City , Pier 1 Imports , and Rite Aid — also report results next week.
From what I'm hearing, this quarter certainly promises to be more than a bit confusing and of course volatile.
Howard Silverblatt, senior index analyst with Standard and Poor's, tells me that he sees a very unusual trend in the earnings estimates he's looking at on S&P 500 companies. "I'm not seeing a good consensus," he said. At the end of the quarter, he says analysts typically adjust their numbers and they form a fairly consistent range, but this year numbers are all over the place. "..Usually by now, you see it. Now we're not seeing it, and these guys put their portfolios where their mouths are. Somebody's going to be surprised."
Interesting to hear that but it's really not surprising when you look at the street's wide ranging views on the economy. Some say we're in recession. Others say not, and there's lots of disagreement on when the recession, or downturn, started or didn't start and when it might end. It's the same trend.
Silverblatt says though the actual earnings reports this quarter might help answer some questions on the economy. He expects a lot of special charges from economic related events, like lay offs and plant closings. "If these are widespread, it will give us an idea of whether we have a mild or perceived recession," he said. First quarter could be the "bottoming" of special charges for non-financial firms. He says more charges are expected for the financials, but not nearly as much as in the fourth quarter.
"Everybody's hoping and praying the fourth quarter should be the bottom" of financial firm charges, he said.
Silverblatt said based on current numbers, the estimate for S&P 500 earnings shows profits should be down 6 percent compared to last year's first quarter. But, when you take financial companies out of the mix, S&P companies' profits would be up 8.5 percent. Financial companies are expected to show a 50 percent decline in profits. "This means there's lots of companies that should have good quarters," he said.
The first quarter will be the third quarter in a row showing a decline in profits. "The last time we saw three quarters in a row of negative, it was actually five quarters and it was Q4 2000 to Q4 2001 ... The good news is that financials are only expected to be down 50 percent. That's good news because that good news translates into $29.8 billion in earnings, compared to the fourth quarter when they lost $23 billion," he said.
For the fourth quarter, earnings for S&P 500 companies were 11.9 percent higher, if the financials are not counted. With the financials included, profits were down 30.8 percent. Financial companies were down 143 percent.
There's a bunch of data points to watch in the week ahead, including pending home sales Tuesday. Wholesale trade is reported Wednesday and international trade data for February is released Thursday. Data on consumer credit will be reported Monday at 3 p.m., and consumer sentiment is Friday at 10 a.m. The NFIB small business survey is released Tuesday at 7:30 a.m. Important to watch will be weekly jobless claims Thursday after Friday's disappointing March number. Oil inventory data is released Wednesday at 10:30 a.m.
Of big interest will be the FOMC minutes from the last meeting, released Tuesday at 2 p.m. The European Central Bank and Bank of England each have policy announcements Thursday in the 7 a.m. hour.
Treasury Secretary Hank Paulson speaks at 4 p.m. Monday at the Inter-American Development Bank Annual Meeting in Miami Beach.
Fed Chairman Ben Bernanke appears twice. He speaks on financial literacy in Washington at 1:30 p.m. on Wednesday. On Thursday, he speaks on the President's Working Group and financial stability at the World Affairs Council of Greater Richmond's Virginia Global Ambassador Award luncheon in Richmond, Va. at 1 p.m.
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