Good Friday delivered the worst job market report in 15 months and leaves many in the stock market wondering if a Federal Reserve interest rate hike is on ice.
What’s more, the economic uncertainty is percolating just as the Q1 earnings reporting season is set to lift off. That could mean scant sleepy days ahead for stock traders. Will spotty economic results at home and abroad—plus a strong dollar’s drag on U.S. exports—taint this next round of corporate results? Let’s remember that some executives have already sent up a few flares. Investors will want to hear more on expectations for late-year earnings, which may give some companies a pass if they put up a few disappointing quarters in the meantime.
Financial markets were volatile all last week and remained so on Friday morning after the Labor Department revealed the U.S. economy added a wimpy 126,000 jobs last month. Economists were expecting twice that amount. While the U.S. equities market was on holiday, S&P 500 index (SPX) futures dropped sharply—nearly 20 points—in reaction to the numbers before closing at 9:15 a.m. Eastern; they reopened Sunday at 6:00 p.m. Early Monday, stock indicators fell as gold rallied and oil prices climbed, too.
Labor Market Letdown
The March hiring tally broke a streak of 12 straight 200,000-plus monthly gains, marking the smallest increase since the end of 2013. What’s more, employment gains for February and January were reduced by a combined 69,000. Already, chatter centers on whether March will be a one-off. Poor weather did cloud much of the country, delaying construction hiring. Oil-sector contraction is also to be expected given falling prices. On the upside, March’s strongest hiring was in the typically higher-paying categories of professional services and health care.
Some Fed members may still be thinking of removing overly accommodative monetary policy at upcoming meetings if they’re too afraid to wait for inflation’s grip to take hold. But the interest rate market is not convinced. In the wake of the jobs report, long-term Treasury yields fell to two-month lows, while the dollar also lost value. That leaves stock traders once again scratching their heads about how to position for the higher rates that are coming—one of these days.
The action Friday concluded a choppy week of trading on Wall Street. Although the SPX rallied for a solid 25-point gain last Monday, it gave back those gains midweek before seeing a modest bounce Thursday.
Meanwhile, the CBOE Volatility Index (VIX), the market’s “fear gauge,” suggested that risk perceptions were edging a bit higher heading into the jobs report. As evidence, VIX, which tracks the implied volatility priced into short-term SPX options, finished the week at 14.67. That’s still below the closely watched 16 line, but marks a respectable move off the late-March low of 12.59 (figure 1).
Weaker Quarter Priced In?
Alcoa (AA) unofficially kicks off the reporting season Wednesday afternoon, but the floodgates on quarterly reports don’t open until the big financials begin to release results from April 14 to April 16.
Overall expectations for Q1 profits have come down dramatically in recent months thanks to a myriad of factors such as falling energy prices, a stronger dollar, and weaker-than-expected economic data. According to Zacks Investment Research, overall Q1 earnings for the S&P 500 are expected to be down 3.8% from a year ago. That compares to estimates for 4% year-over-year growth in Q1, when analysts were crunching estimates three months ago.
However, not all sectors will tell the same tale. In fact, stripping out energy, overall earnings for the S&P 500 in Q1 are expected to be up 4.1%. Finance and health care are expected to drive most of the growth. In short, the reporting season is expected to offer a mixed bag of good and bad reports from the sectors we expect to deliver good or bad news. Still, investor angst could remain elevated until the meatiest numbers begin to roll out.
On the economic front (see figure 2), the focus will likely be on weekly jobless claims Thursday after the poor jobs data last week. Minutes from the latest Fed meeting, due Wednesday afternoon, will be scrutinized for clues about what must be continued heated discussions over monetary policy.
So, let’s see what we have in store after that jobs report. At the least, a Fed reassessment and pre-earnings jitters are likely to be a short-term overhang in the stock market.