It was a disappointing week for stock market bulls. Monday's big gains on March 30th didn't last and stocks faded lower ahead of a three-day Easter weekend. Comments from a Chinese banker sparked the rally on Monday but there was no follow through. Economic data continues to arrive mixed. Traders were cautious ahead of Friday's jobs report with the market closed.

The big cap S&P 500 index eked out a minor gain while the small cap Russell 2000 continues to show relative strength. Transportation stocks and biotech stocks were some of the market's worst performers. Meanwhile housing stocks displayed relative strength. The dollar pared its midweek rally and crude oil surged +2.3% for the week to close at $49.55 a barrel. Gold is at $1,202 an ounce. The ten-year yield settled at 1.84%.

Economic Data

The market was faced with a both good and bad economic data points last week. The Conference Board's consumer confidence survey improved from 98.8 in February to 101.3 in March. Pending home sales soared +3.1% when economists were only expecting +0.3%. It was the best month since June 2013. The Case-Shiller 20-city home price index rose +4.5% versus a year ago.

Consumer spending in general has been soft but consumers are still buying cars. The seasonally adjusted annual rate for car sales in the U.S. hit 17.15 million in March. That's up from 16.23 million in February. Analysts were only expecting 16.9 million. This is the best March reading since the year 2000. The average price rose for the ninth month in a row to $32,201.

The Chicago PMI improved from 45.8 in February to 46.3 in March. Unfortunately it's the second month in a row in negative territory (below 50.0). The good news ends there.

The national ISM manufacturing index dropped from 52.9 in February to 51.5 in March. Estimates were for 52.5. This is the slowest pace of economic growth since mid 2013. The regional Dallas Fed manufacturing index dropped from -11.2 to -17.4 in March. Consumer spending did improve from -0.2% in February to +0.1% in March but analysts were looking for +0.2%. The monthly ADP Employment report showed +189,000 new jobs when analysts were looking for +225K.

Jobs Report

Speaking of jobs, the March nonfarm payroll report was a disaster. Economists were estimating +248,000 new jobs last month. The range was from +179K to +300K. The government's report came in at +126,000. This was less than half of February's job growth of a downwardly revised +264,000.

The prior two months were revised lower -70,000. This was way below estimates and suggests the U.S. economy slowed significantly last month. March's reading of 126K job snapped a 12-month streak of gains above 200,000. It was the longest such streak since 1994. March's job report is also the lowest reading since December 2013.

Josh Brown, with The Reformed Broker, commented on the jobs report and Wall Street's attempt to forecast it. According to Mr. Brown, "In a workforce of 100,000,000 people, pinpointing how many got or lost a job inside of a single 30-day period is like attempting to count the stars in the galaxy. Add in all the birth/death/seasonal adjusting that goes on behind closed doors and it becomes like counting the stars with a blindfold on."

The monthly data did show the unemployment rate dipped to 5.5%, a new six and a half year low. We also saw the labor force participation rate slip to a new 36-year low at 62.7%.

Overseas Economic Data

Japan said their industrial production for February dropped -3.4% after a +3.7% gain the prior month. China reported its manufacturing PMI improved from 49.9 to 50.1. It's the first positive reading (above 50.0) in three months. The HSBC Chinese manufacturing PMI improved from 49.2 to 49.6.

China was behind the big market rally on Monday. Traders were reacting to comments from Zhou Xiaochuan, a governor in the People's Bank of China, who said China has more "room to act" with its monetary policy and other measures to stimulate the economy. You know the market loves any form of QE so equities rallied on this story. You can read the Bloomberg article here.

The Eurozone said their manufacturing PMI improved from 51.9 to 52.2 thanks in large part to Germany's manufacturing PMI rising from 52.4 to 52.8. The Eurozone also reported its CPI for March dropped -0.1% year over year while its core-CPI rose +0.6%. The Eurozone unemployment rate ticked lower with an improvement from 11.4% to 11.3%. Meanwhile the Eurozone Business and Consumer Survey for March rose to multi-year highs with an improvement from 102.3 to 103.9, above expectations.

Greece

Greece seems to be inching closer and closer to a default and/or leaving the Eurozone. The new Greek government claimed it could run out of money by April 9th. The country has a 460 million euro debt payment to the IMF due on April 9th. Greek leaders are asking for additional bailout funds or they may miss the payment. Greek and European finance ministers have been arguing over terms for the next tranche bail out money up to 7.2 billion euros but Europe doesn't want to release the cash until Greece shows them how they will enact the new reforms. Greek Prime Minister Alexis Tsipras is supposed to visit Russia on April 8th. He'll probably ask Russian leaders for aid. There has been speculation that Russia might help Greece if they can turn Greece into an ally and use the country as a Mediterranean naval base. You can bet that Greece will be making headlines again as we near the April 9th deadline.




Major Indices:

The S&P 500 barely managed a gain for the week. It also eked out a nine-point gain for the first quarter. That marks the ninth consecutive quarterly gain. Upward momentum has clearly stalled. Stocks might be stuck churning sideways until Q1 earnings season begins.

On a short-term basis the 2,040 level looks like support. Below that the simple 200-dma near 2,013 and the 2,000 mark could be additional support. A -5% correction from its all-time highs set six-weeks ago would be about 2,000. Below that the January and December lows are possible support.

chart of the S&P 500 index:

The NASDAQ composite ended the holiday-shortened week with a loss. The bounce on Monday failed at its 10 and 20-dma. Now the index looks like it's headed for what should be support near the 4,800 level. Unfortunately a move that low would break the trend line of higher lows (see chart). If it really gets ugly then a breakdown under 4,800 might signal a drop toward 4,600 and its simple 200-dma.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index continues to hold up the best. The $RUT added +1.2% last week and is still above its trend line of higher lows. It's less than 15 points away from new all-time highs. Investors probably feel more comfortable owning small caps because they normally have less exposure to currency issues. The strong dollar doesn't hurt the small caps as much as it impact the large cap companies who do more business overseas.

chart of the Russell 2000 index



Economic Data & Event Calendar

After last week's parade of data the pace of economic reports slows down. The only report of note might be the FOMC minutes on Wednesday. Alcoa (AA) kicks off the Q1 earnings season on April 8th (after the close) but the wave of earnings reports doesn't really hit until the following week.

Economic and Event Calendar

- Monday, April 06 -
ISM services

- Tuesday, April 07 -
Eurozone PPI data

- Wednesday, April 08 -
Eurozone retail sales
FOMC minutes
Alcoa (AA) kicks off Q1 earnings season

- Thursday, April 09 -
Wholesale inventory data

- Friday, April 10 -
(nothing significant)

Additional Events to be aware of:

April 29th - FOMC policy update
May 7th - Election in the United Kingdom

Looking Ahead:

Before we look ahead I'll briefly comment on the Iran nuclear deal last week. The negotiations between Iran and the P5+1 nations (U.N. security council plus Germany) were rushing to get done by March 30th. I will use the term "get done" very loosely. The marathon talks ended with what President Obama called an "historic" deal with Iran. Unfortunately this "deal" is nothing more than a framework of ideas that the U.S. bullied its allies into accepting with nothing in stone.

The only thing this "deal" achieved was to give Iran another three months with a new deadline of June 30th to hash out the details. The current "deal" is supposed to delay Iran's ability to "breakout". This so called "breakout time" is how long it would take for Iran to assemble a nuclear bomb. The U.S. wants at least a year. Iran wants less than that. Iran has never followed through on any previous deal. Why would they commit to a new deal now when they're so close to achieving their goal - a nuclear bomb. What's really scary is that if Iran gets nukes then Saudi Arabia, their archrival, will want nukes. It will spark a nuclear arms race in the Middle East. That's not a very comforting thought.

Back home in the U.S. investors will soon be focused on Q1 earnings. We already know, with a deluge of disappointing economic data, that the U.S. economy slowed down in the first quarter. The Atlanta Federal Reserve has been downgrading their Q1 GDP estimates on an almost weekly basis. Now they're estimating +0% growth in the first quarter when eight weeks ago they were forecasting +1.9% growth. That certainly doesn't bode well for corporate earnings.

FactSet reports that 85 of the S&P 500 companies have already issued negative earnings guidance. Only 16 have issued positive guidance. If that 16 number stands it would be the lowest number since Q1 2006. The current number of 85 announcing negative guidance is above the five-year average. Currently analysts are expecting S&P 500 earnings growth to be -3% thanks to a -63% drop in earnings from the energy sector. Here's the good news. Everyone already knows that Q1 earnings are going to stink. Expectations are low. That means there is a chance that earnings could come in better than expected. Maybe I should say better than feared.

Looking at our immediate future Monday morning could be rough. The lower than expected jobs number on Friday morning sparked a sharp sell-off in the S&P futures. I would not be surprised to see stocks gap open lower on Monday morning. On the plus side the jobs report also pushed out expectations for the Fed's next rate hike. The fed fund futures rate saw odds of a hike in June drop to 11% and odds of a hike in September drop to 35%. How can the Fed raise rates when the economy appears to be slowing and job growth is suddenly in doubt?

The week in front of us could be another volatile one.

~ James