After April’s weak jobs report, investors will scrutinize each piece of economic data for a read on whether the economy's soft patch is temporary or the start of something more troubling.
“We’ve confirmed we’re in a soft patch. Now the debate will reignite itself. Is the soft patch the start of a summer swoon? Will the market fall another 20 percent like it did last year, or is it a normal part of the cycle?” said Art Hogan of Lazard Capital Markets.
Weekly jobless claims, producer inflation data and trade data are among the economic reports investors will focus on in the week ahead. There are also several Federal Reserveofficials speaking, including Fed Chairman Ben Bernanke who speaks at a Chicago Fed conference on bank structure and competition.
Dozens of companies report earnings, including Cisco , Macy’s , and Disney . Facebook kicks off the road showfor its much-anticipated IPO, with an investor meeting in New York Monday, and Warren Buffettwill be a special guest on CNBC’s “Squawk Box” following Berkshire Hathaway’s annual meetingSaturday.
The weekend elections in France and Greece will also keep Europe in the headlines and some traders squared positions Friday ahead of those races.
“What’s likely is we fuel the fire with some bad news out of Europe. That’s definitely something that’s concerning,” said Steve Massocca of Wedbush Securities. “I don’t know if I think the (U.S.) economy is really slowing down enough to hurt this market.”
Socialist presidential candidate Francois Hollande is leading French President Nicolas Sarkozy in the polls and traders, therefore, have been expecting a Hollande victory. In Greece, however, they fear a new fractured government that faces difficulty making important decisions.
“Our team thinks the elections in Greece are more important than the elections in France with the extra funding needed by Greece around the middle of the year,” said Robert Sinche, chief global currency strategist at RBS.
Sinche said he is also watching Chinese inflation data, expected Friday, and Chinese bank-lending data. “I think the Chinese inflation data is pretty important for what it might tell us about policy flexibility in China,” he said.
The April jobs report, released Friday, was far worse than Wall Street expected, with just 115,000 nonfarm payrolls added. The unemployment rate fell to 8.1 percent from 8.2, due to a decline in the participation rate.
“For us, over the next few weeks, it’s going to be weekly claims and weekly confidence numbers,” Sinche said. “The employment gains weren’t strong enough to eliminate some of the worst fears, but the decline in the unemployment rate made it more difficult for the Fed to consider more policy easing. You had the worst outcome from a risk perspective.”
Stocks sold off sharply Friday on the disappointing employment report, and other risk assets, like oil, also tumbled. West Texas Intermediate crude oil was down nearly 4 percent Friday to $98.49 per barrel, and it was 6 percent lower on the week.
The Dow lost 1.4 percent in the past week to 13,038, and the S&P 500 fell 1.6 percent to 1369, while Nasdaq slid 2.3 percent to 2956. The dollar was higher, with the dollar index gaining nearly a percent.
“I don’t think we’re going to go into a prolonged period of pullback," Hogan said. "I think we’re going to have a garden variety short correction in a longer term constructive market.” Hogan said he would not be surprised by a 10-percent correction.
Massocca said better-than-expected corporate profits are one positive for stocks. “The economy is slowing down and Europe is an issue. Companies are making money. Earnings season was good again, and corporate profits are at an all-time high,” he said.
So far, 80 percent of the S&P 500 have reported earnings, and earnings growth is now running at a pace of about 7.8 percent for the quarter, according to Thomson Reuters. That is more than four times what was expected.
“If you look at the earnings data, I actually think it’s more supportive of equities than the economic data might be,” said Savita Subramanian, equities and quant strategist with Bank of America Merrill Lynch. “One of the best near-term indicators for equities is the direction of the earnings-revision ratio for the S&P 500. It’s the number of upward to downward revisions to earnings estimates. We actually saw that begin to improve earlier this year.”
The earnings-revision ratio increased to 1 in April from 0.8 in March, a sign that analysts are making as many upward as downward revisions to earnings estimates. It had reached a low of 0.5 in November. The highest revisions rates are in discretionary and tech, while the lowest are in telecom and utilities, she noted.
Subramanian said when analysts start to get less negative, that is a positive leading indicator for the stock market.
“Analysts are actually revising down as much as up, but the pace of their negativity has abated from what it’s been over the past few months. We look at the number of instances of upward to downward earnings guidance coming from S&P management. That has shifted. A month ago, managements were guiding down twice as much as they’d been guiding up," she said.
While more optimistic on earnings, Subramanian said she maintains a 1400 target on the S&P 500 for year end. “There are a lot of unknowns. There’s a lot of macro overhangs. That’s what keeps us less optimistic on equities,” she said. “I just think there’s too much risk premium. I just don’t think this is the year we’re going to see equities do anything to write home about.”
As for next week, she expects economic news to keep trumping earnings results. “If we get disappointing numbers that could overwhelm positive earnings data ... this quarter macro is trumping fundamental. The numbers next week could be crucial to market performance,” she said.
What to Watch
Earnings: Sysco, Tyson Foods, Electronic Arts, Dish Network, Echostar, Pitney Bowes, Churchill Downs, Dun & Bradstreet, Avis Budget Group, HollyFrontier
Facebook starts its IPO road show
0300 pm Consumer credit
Earnings: Disney, DirecTV, Discovery Communications, Liberty Media, Fossil, HSBC, Scotts Miracle-Gro, Tenet Healthcare, Wendy’s, EOG Resources, Energy Transfer Partners, Statoil, International Flavors and Fragrances
0730 am NFIB small business survey
1000 am JOLTS
1245 pm Dallas Fed President Richard Fisher speaks in Dallas
0100 pm $32 billion 3-year note auction
Earnings: Toyota, News Corp, Cisco, Macy’s, Monster Beverage, AOL, Dean Foods, ING Group, Priceline.com, Live Nation, Activision Blizzard, Teva Pharmaceuticals, Tim Horton
1000 am Wholesale trade
1000 am Minneapolis Fed President Narayana Kocherlakota speaks on a more transparent FOMC
1045 am Cleveland Fed President Sandra Pianalto speaks on leadership
1200 pm Philadelphia Fed President Charles Plosser speaks in Philadelphia
0100 pm $24 billion 10-year auction
Earnings: Anglogold Ashanti, Arcelor Mittal, Brookfield Asset Management, Sony, Kohl’s, AMC Networks ,Express Scripts, Nordstrom, Nuance Communications, McDermott
0830 am Weekly jobless claims
0830 am International trade
0830 am Import prices
0915 am Chicago Fed President Charles Evans on bank structure
0930 am Fed Chairman Ben Bernanke speaks at Chicago Fed conference on bank structure
0100 pm 30-year auction
0120 pm Minneapolis Fed’s Kocherlakota on monetary transparency
0200 pm Federal budget
Earnings: Nissan, Nvidia, Telefonica, Iamgold
0830 am PPI
0955 am Consumer sentiment
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