Traders work on the trading floor of the New York Stock Exchange.
April started on a rally and the market could continue to advance as the month progressed, strategists say.
The U.S. Department of Labor’s surprisingly strong March jobs report this Friday showed 916,000 new jobs were created in March, compared to the 675,000 economists had expected.
The coming week is expected to be quite calm. Some economic reports and Federal Reserve spokesmen are filling the pre-earnings lull.
The Institute of Utilities Management in Services Survey will be released next Monday and should receive special attention after receiving the Institute’s survey on manufacturing at its highest level since 1983. The minutes of 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 think. We have a low base,” said Stephen Stanley, chief economist at Amherst Pierpont.
Economists expect a very strong second quarter as the economy reopens and stimulate stimulus spending. This should have a positive impact on stocks – unless interest rates are rising too quickly.
The major stock indices were significantly higher when 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 rose more than 170 points and the tech-heavy Nasdaq Composite rose 1.8%.
The closely watched benchmark 10-year government bond yield was up 1.68% on Friday morning, well below the recent high of 1.77% hit earlier in the week.
The 10 year old is important because it affects mortgages and other credit, but recently it has had a negative correlation with technology stocks as well. As the 10 year rate of return got higher, technology declined.
All eyes on the result
“The macro calendar is pretty light. I think the focus will be on earnings pretty quickly,” said Shawn Snyder, head of investment strategy at Citi US Wealth Management. “That will be the next one to turn to.”
He said the market is often weaker just before the profit season.
According to Refinitiv, earnings are expected to increase by 24.2% year-on-year for the first quarter. It will be the first quarter that last year’s results included the impact of shutting down the pandemic.
Some strategists expect the earnings season to bring more favorable comments from companies that could result in positive forecast revisions and fuel the stock market.
“About 13 months ago, COVID-19 sent us home from our offices and our children from school. While the pandemic nearly brought the global economy to a standstill, an unprecedented political response kept the economy alive, leading to the shortest fall in the recession and the steepest stock led to a market recovery in history, “said Jonathan Golub, chief strategist, US equities at Credit Suisse.
Golub said the S&P 500’s 78% rise from last March’s low was largely earnings-driven.
“In each of the last two recovery periods, the trend towards positive revisions lasted 2-3 years and provided an important tailwind for the market,” he wrote in a note.
He added that economists have further revised growth forecasts upwards.
“Our work shows that every 1% change in GDP results in a 2½ to 3% change in revenues and even greater improvements in profits,” wrote Golub.
April is anything but the cruelest month
Aside from an expected rebound in earnings, some strategists have expected April to be a bullish time for stocks, as it has been in the past.
For example, Tom Lee, managing partner of Fundstrat, points to the decline in the VIX, the Chicago Board Options Exchange’s volatility index, to pre-pandemic levels and says it’s constructive for stocks.
The VIX is calculated based on the puts and calls in the S&P 500 that are traded on the CBOE.
Lee also noted that the market had better than usual April performance when the market closed higher on March 31, the last day of the first quarter, and again on April 1, the first day of the second quarter.
Since World War II, when those two days were positive, the S&P 500 rose an average of 2.4% in April from its usual 1.3% gain, Lee said.
“The bottom line is this [a] positive environment and risk / return for stocks. That keeps us constructive, “he wrote in a note.
Sam Stovall, CFRA’s chief investment strategist, said the market is entering April and Q2 with a tailwind.
“April is usually good. It’s the best month in terms of average price change. The second quarter, on average, isn’t a bad quarter. It’s up an average of 2.8% since 1990, and all 11 sectors have seen average gains.” , he said.
Stovall said some of the cyclicals may have outdone themselves and energy, industry and finance may pause. These sectors outperformed while technology lagged.
The market enters the “Sale in May” period in the second quarter. The saying “sell in May and go away” is based on the idea that stocks tend to underperform May through October.
“Tech was a pretty good performer on that May sale. Now is probably not the time to get out of tech,” said Stovall. “Tech could get some short-term redress.”
The Federal Reserve will release the minutes of its final meeting on Wednesday afternoon and investors will check for new comments on inflation. Given the already rising prices for fuel and other commodities, investors fear that more stimulus could drive inflation higher.
Fed chairman Jerome Powell said after the March meeting that the Fed views inflationary pressures as temporary, but markets remain concerned that this could become a bigger problem. Inflation is currently well below the Fed’s 2% target.
The producer price index, which measures the average change in prices domestic producers receive for their production, will also be closely watched when reported on Friday.
As for Fed spokespersons, Powell is expected to discuss the global economy on Thursday at an International Monetary Fund panel moderated by CNBC’s Sara Eisen.
Other Fed spokesmen include Chicago Federal Reserve President Charles Evans, speaking Tuesday and Wednesday, and Richmond Federal Reserve President Tom Barkin, speaking Wednesday.
Treasury Secretary Janet Yellen speaks on Monday in a webinar for the Chicago Council on Global Affairs on Monday’s economic recovery.
Calendar for the week ahead
10:00 a.m. factory orders
10:00 a.m. Non-production dates of the Institute for Procurement Management
11:00 am Treasury Secretary Janet Yellen at the Chicago Council on Global Affairs
10:00 JOLTS vacancies
4:05 p.m. Charles Evans, President of the Chicago Fed
8:30 a.m. trade balance
9:00 a.m. Evans at the Chicago Fed
11:00 am Rob Kaplan, President of the Dallas Fed
12:00 noon Richmond Fed President Tom Barkin
2 p.m. Federal Open Market Committee Minutes
3 p.m. consumer credit
8:30 a.m. unemployment claims
11:00 am James Bullard, President of the St. Louis Fed
12:00 noon Fed Chairman Jerome Powell discusses economics in the panel of the International Monetary Fund
8:30 a.m. producer price index
10:00 a.m. wholesale stocks