as the month gets underway, strategists say.
The U.S. Labor Department’s surprisingly strong March jobs report this Friday showed that there were 916,000 jobs added in March, compared to the 675,000 expected by economists.
The week ahead is expected to be fairly quiet, with a few economic reports and Federal Reserve speakers filling the lull before earnings season.
The Institute for Supply Management’s service sector survey will be released next Monday and should get close attention after institute’s manufacturing survey came in at the highest level since 1983. Minutes from the last Federal Reserve meeting will be released next Wednesday afternoon.
“Literally everything, or almost everything, should be very robust for the foreseeable future, I would think. We’re coming off a low base,” said Stephen Stanley, chief economist at Amherst Pierpont.
Economists expect a very strong second quarter as the economy reopens and stimulus spending kicks in, and that should be positive for stocks — unless interest rates rise too quickly.
Major stock indices were sharply higher as the calendar rolled into April.
On Thursday, the S&P 500 rose 1.2% to a new record close of 4,019.87. Meanwhile, the Dow Jones Industrial Average climbed more than 170 points, and the tech-heavy Nasdaq Composite jumped 1.8%.
The closely watched benchmark 10-year Treasury yield, meanwhile, was higher at 1.68% Friday morning, well below recent high of 1.77% reached earlier in the week.
The 10-year is important because it influences mortgages and other loans, but recently it has also had a negative correlation recently with tech stocks. When the 10-year yield edged higher, tech went lower.
All eyes on earnings
“The macro calendar is pretty light. I think attention will turn to earnings pretty quickly,” said Shawn Snyder, head of investment strategy at Citi U.S. Wealth Management. “That will be the next thing to turn to.”
He said the market is often weaker just ahead of earnings season.
Tiffany McGhee: We’re expecting volatility, but looking to buy the dip
First quarter earnings are expected to be up 24.2% year-over-year, according to Refinitiv. It will be the first quarter where the prior year results included the impact of the pandemic shutdown.
Some strategists expect the earnings season to bring with it more favorable comments from companies that could lead to positive forecast revisions, providing fuel for the stock market.
“Approximately 13 months ago, COVID-19 sent us home from our offices and our kids from school. While the pandemic nearly shut down the world economy, an unprecedented policy response kept the economy afloat, leading to the shortest recessionary decline and the steepest stock market bounce in history,” noted Jonathan Golub, chief U.S. equity strategist at Credit Suisse.
Golub said that the 78% rise in the S&P 500 from the bottom last March was driven in a big way by earnings.
“In each of the past two recovery periods, the trend of positive revisions lasted 2-3 years, providing an important tailwind for the market,” he wrote in a note.
He added that economists have continued to revise growth forecasts higher.
“Our work shows that every 1% change in GDP drives a 2½–3% change in revenues, and even larger improvements in profits,” Golub wrote.
April is far from cruelest month
Aside from an expected earnings bounce, some strategists have been expecting April to be a bullish time for stocks, as it has been historically.
Tom Lee, managing partner of Fundstrat, for instance, points to the decline in the VIX, the Chicago Board Options Exchange’s Volatility Index, to pre-pandemic levels and says that’s constructive for stocks.
The VIX is calculated based on the puts and the calls in the S&P 500, trading on the CBOE.