Week Ahead: Stock Market Could Face Headwinds
Stocks are likely to encounter headwinds as the market tries to keep pushing higher in the week ahead.
The S&P 500 has gained in seven of the past eight weeks, and is positioned to keep rising after closing above a key resistance level Friday. The S&P finished the week up 1.3 percent, at 877, a level not seen since Jan. 9.
Yet, traders say there are a number of risks in the coming week, the biggest of which will be the results of the government's stress tests on 19 banks, now expected to be released Thursday. There are also a number of economic reports, some major earnings, and testimony from Fed Chairman Ben Bernanke before the Joint Economic Committee Tuesday.
A real wild card for the markets is the swine flu outbreak, which has so far been ignored but could become a factor if it is seen as a more deadly threat in the U.S.
Berkshire Hathaway [BRK 92005.00 -1995.00 (-2.12%) ] held its annual meeting Saturday and that could be a catalyst for stocks Monday. CEO Warren Buffett said Berkshire's first-quarter earnings would likely be down about 11 percent. He also said he'd love to buy a U.S. bank if he could, and that he'd apply his own "stress test." (See complete coverage of the meeting.)
At the top of the list for markets though are those stress tests of the biggest banks that took funds under the government's Troubled Asset Relief Program. The results for each of the institutions were expected Monday but the release was moved to Thursday. Several banks are expected to need capital but it is not clear how that information will be reported and what solutions for capital raising will be included with the reports.
"They postponed the stress test again so people are saying they want to tiptoe into next week," said Art Cashin, director of floor operations for UBS. "The floor has always thought the stress test was a no-win situation...from the minute it was conceived it was thought to be a a not so hot idea. They're just worried about the presentation now."
David Kotok of Cumberland Advisers said it's important the tests are seen as credible. "If some pass and some fail, the market will adjust the prices between the two groups," he said.
Steven Stanley, chief U.S. economist at RBS, said it appears the government's negotiations with the banks are what stalled the release of the tests. "I think the government just assumed the banks would take whatever results were presented to them, and the banks are complaining they did it wrong. As far as big events next week, that's clearly one and the other one is the payroll number on Friday," he said.
Stanley said he expects that April employment report to show unemployment has climbed to 8.8 percent. As for the pace of job loss, "we do expect to see some improvement.. a decline of 535,000 (non farm payrolls). It's gargantuan but an improvement relative to March. Our sense is, as with other indicators, that things are still pretty bad but they are starting to decelerate," he said.
"We're now starting to see evidence that suggests that things, at a minimum, are getting worse at a slower pace but perhaps stabilizing in certain areas," said Stanley. He said he will also be watching chain stores' April sales Thursday, which will provide a good look at the consumer.
Another big market event will be the Treasury's issuance of more than $70 billion in 3-year, 10-year and 30-year notes in three days of auctions. The yield curve steepened in the past week as the long end came under pressure on supply concerns. The yield on the 10-year rose to 3.174 percent, its highest level since Nov. 24.
Whither Stocks?
Kotok believes swine flu could become an issue for stocks if there are more deaths in the U.S. or other parts of the world. "The stock market has ignored swine flu for all intents and purposes. It's busy with its green shoots," said Kotok. "Do you weigh risk proactively or reactively? If proactively, you have to manage risk events before they are understood."
If the public does start to have a greater fear of the flu, the resulting social behavior would have the potential to cause an economic shock. "When things are good, large shocks are dealt with...This shock would come when the economies around the world are weak, and the U.S. is particularly weak," he said.
Kotok said there are other risks for the market in the economy, including the growing problems in commercial real estate and commercial mortgages. Unlike housing, there is no political sympathy for commercial property owners and now the shuttering of auto dealerships puts more pressure on the sector which already faced oversupply.
Richard Bernstein, former chief investment strategist at Merrill Lynch, also sees some hurdles for the stock market. He said investors are not considering the type of economic impact that could come from the ripple effect of General Motors [GM 1.81 -0.11 (-5.73%) ] shutting down its production for nine weeks, a process that starts Monday. He said that shutdown will show up in economic statistics as it impacts suppliers and other related parts of the economy. Chrysler, which filed for bankruptcy Thursday, is also shutting down its production while in bankruptcy.
"Another thing people aren't considering when trying to anticipate the turn...is that it's not just lower interest rates. It's lower interest rates and pent up demand. it's hard to imagine there's pent up demand for housing," he said.
Bernstein, like many, thinks the market has gotten ahead of itself. "I think a pull back is pretty likely," he said. "I think consensus has changed quite quickly that we're out of the soup, and things are getting better...I think he only one that's showing real improvement is the stock market."
Bernstein said though there are some positives, including the slope of the yield curve. "There's no doubt about that. The question is how bad are the bank balance sheets," he said. The dollar's strength is also a positive. "I think people should be more bullish about the dollar. I think people forget what it is financial institutions and banks do, that is create dollars. We had a credit bubble, and the dollar was exceptionally weak. If you are a bear on credit, you want to be a bull on the dollar and vice versa," he said.
Econorama
Jobs data is the big one, but there is plenty to watch in the coming week. On Monday, there is pending home sales and construction spending data. The ISM non manufacturing number is reported Tuesday, and Wednesday is the ADP employment report, a kind of preview to Friday's number. On Thursday, more hints at the jobs number come when the latest weekly unemployment claims data is reported. Productivity and costs and consumer credit are also reported that day. In addition to employment on Friday, wholesale trade data for March is reported.
Besides Bernanke's Congressional testimony earlier in the week, the Fed chairman speaks at the Chicago Fed's conference on bank structure and competition Thursday at 9:30 a.m. Chicago Fed President Charles Evans speaks at the same conference, as does FDIC Chair Sheila Bair.
Other Fed speakers include Fed President Thomas Hoeing who speaks in New York on the financial crisis Monday, and Richmond Fed President Jeffrey Lacker speaks in Charlottesville, Va. Monday afternoon. San Francisco Fed President Janet Yellen speaks at U.C. Berkeley Tuesday on financial turmoil.
Earnings Central
Nearly 80 S&P 500 companies report earnings in the coming week. On Monday, Tyson Foods, Sysco, Sprint Nextel, Loews, Entergy, Estee Lauder, Chesapeake Energy and McKesson report. Disney, Kraft Foods, CVS Caremark, Duke Energy, UBS, Archer-Daniels and Teva report Tuesday. (See more earnings below quote box below.)
Earnings Next Week ...
tsn 10.56 0.02 +0.19% 3,577,768
syy 24.35 1.02 +4.37% 6,439,859
s 4.67 0.31 +7.11% 48,457,600
l 25.19 0.30 +1.21% 2,759,216
etr 66.90 2.13 +3.29% 5,189,790
el 31.13 1.23 +4.11% 3,522,663
chk 20.89 1.18 +5.99% 15,504,441
mck 37.93 0.93 +2.51% 2,688,784
dis 21.94 0.04 +0.18% 15,650,162
kft 23.49 0.09 +0.38% 5,852,450
cvs 32.26 0.48 +1.51% 8,536,869
duk 14.11 0.30 +2.17% 5,917,893
ubs 13.71 0.07 +0.51% 2,843,489
adm 25.51 0.89 +3.61% 5,073,858
teva 44.16 0.27 +0.62% 3,147,447
Wednesday's reports include News Corp, Anadarko, Devon Energy, PG&E, Transocean, and Marsh and McLennan. On Thursday, Axa, Dynegy, D.R. Horton, Thomson Reuters, Unilever, Sara Lee, Nasdaq OMX, CBS, Public Storage, Allstate, and Nvidia report. Friday's major companies are Toyota and Berkshire Hathaway.
...and More Earnings Next Week
nws 9.26 0.14 +1.54% 4,483,872
apc 45.63 2.57 +5.97% 6,493,037
dvn 54.14 2.29 +4.42% 5,122,182
pcg 37.80 0.68 +1.83% 1,560,916
rig 70.62 3.14 +4.65% 4,875,209
mmc 20.06 -1.03 -4.88% 7,762,758
axa 17.09 -0.09 -0.52% 1,033,937
dyn 1.83 0.05 +2.81% 6,633,477
dhi 12.36 -0.69 -5.29% 8,573,872
trin 158.20 3.55 +2.3% 0
un 19.89 0.10 +0.51% 1,560,721
sle 8.28 -0.04 -0.48% 5,793,259
ndaq 19.36 0.13 +0.68% 2,962,402
cbs 7.19 0.15 +2.13% 9,542,422
psa 64.66 -2.20 -3.29% 2,835,631
all 23.10 -0.23 -0.99% 4,250,306
nvda 11.67 0.19 +1.66% 20,549,898
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