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Week Ahead: For stocks, there's no need to fear good news

A trader works on the floor of the New York Stock Exchange as it closes for the week, July 5, 2013. REUTERS/Lucas Jackson
A trader works on the floor of the New York Stock Exchange as it closes for the week, July 5, 2013. REUTERS/Lucas Jackson

By Ryan Vlastelica

NEW YORK (Reuters) - Wall Street doesn't hate good news after all.

The June jobs figures were stronger than expected and caused a big selloff in the bond market. That further underscored expectations that the Federal Reserve will be chopping back its big bond-buying program sooner rather than later. This kind of occurrence in the past would have caused the stock market to freak out.

But the three major U.S. stock indexes climbed 1 percent on Friday, possibly pointing the way to more gains ahead.

The stock market has been in an odd spot for some time. Fear that the Federal Reserve would reduce its monthly bond-buying stimulus, designed to boost borrowing demand and help the U.S. economy, put investors in the position of rooting for just-OK data, the kind of figures that would keep the spigot open while still pointing to decent growth.

This report may have definitively changed that outlook. In June, a total of 195,000 jobs were created - much stronger than the forecast for 165,000. Government data also showed that the U.S. labor force has increased for three straight months now. The 10-year U.S. Treasury note's yield jumped to a two-year high above 2.70 percent from 1.60 percent in a matter of weeks.

In that time, equities have barely budged. Sure, the S&P 500 has drifted off its all-time closing high of 1,669.16 reached on May 21. It's still less than 3 percent from that mark despite the sharp rise in interest rates. Light volume in the stock market, however, means that the move up should be taken with a grain of salt. And it makes the next several days that much more important.

"Good news is good news, but there's so much uncertainty about how payrolls could impact markets," said David Kelly, who helps oversee $400 billion as chief global strategist for JPMorgan Funds in New York. "The market is schizophrenic about this."

Good news in the form of bullish economic data has recently been taken as a negative, causing market selloffs on the theory that it means the Federal Reserve will slow its stimulus. While comments from Fed officials helped relieve those concerns last week, June's strong payrolls data refocused investors' attention on the uncertainty.

The June nonfarm payrolls report raises the stakes for Federal Reserve Chairman Ben Bernanke, who will be speaking on Wednesday before the National Bureau of Economic Research. Investors will closely scrutinize his comments for any hint about whether the jobs report could mean a faster end to the Fed's bond-buying stimulus program.

Some strategists said the bond market's selloff was in part because of thin volume exacerbating wild swings. Because of that, "it is unlikely that (yields) will rise any more than they already have," said Alec Young, global equity strategist at S&P Capital IQ in New York. "That means that if we get good news, it will come without an accompanying rise in rates, which is great for stocks."

Major signals for the market will come from areas with an outsized sensitivity to macroeconomic growth and higher interest rates. Those areas have done relatively well since May 21, when the Dow and the S&P 500 ended at record highs. Small-cap stocks jumped in their best week since mid-May, with the S&P 600 small-cap index <.SPCY> closing on Friday at 568.15, an all-time high.

Financial stocks were the strongest sector on Friday, with the S&P financial sector index <.SPSY> up 1.8 percent. Regional banks such as SunTrust Banks were among the S&P 500's biggest percentage gainers because those companies benefit from rising rates because it boosts their ability to profit from lending at higher rates while borrowing at lower rates.

IN SEARCH OF CLARITY

On Wednesday, the Federal Reserve will release the minutes from its June 18-19 meeting. Those minutes are likely to attract heightened attention from Wall Street since they are coming out on the same day that Bernanke speaks to the National Bureau of Economic Research.

The consensus on when the Fed will start cutting back its stimulus sits firmly in September of this year, with 11 of 16 primary dealers believing that, according to a Reuters poll, compared with seven of 17 in the June 19 Reuters poll.

On May 22, Bernanke said the quantitative easing program would be slowed if economic growth met the Fed's targets. Investors interpreted that as an indication of an early exit, sparking a steep slide in stocks and a surge in U.S. Treasury yields that prompted Goldman Sachs to close its recommendation that investors buy rate-sensitive names.

"The market is so inundated with voices from Fed officials - some far more reassuring than what we heard from Bernanke - that there's a lot of confusion," said Kristina Hooper, head of portfolio strategies at Allianz Global Investors in New York.

"Hearing him next week will settle things, especially on the heels of the jobs report," she said. "This is such a data-driven environment that to get a sense of how the Fed is viewing things is critical."

Stocks have stabilized after the recent decline. On Friday, the S&P 500 closed above its 50-day moving average for the first time since June 19.

For the week, the Dow Jones industrial average <.DJI> rose 1.5 percent, the S&P 500 <.SPX> gained 1.6 percent and the Nasdaq <.IXIC> jumped 2.2 percent. Friday's close marked the end of the first trading week in the third quarter, although it was cut short by the market's closure for the Independence Day holiday.

For the year so far, the Dow is up 15.5 percent, while the S&P 500 is up 14.4 percent and the Nasdaq is up 15.2 percent.

The Fed probably will be the major driver for equities next week, although geopolitical tensions will also be in focus. The unrest in Egypt has generated concerns about oil supply, pushing crude prices to 14-month highs.

Fundamentals will return to the forefront as companies begin to release second-quarter results next week. Expectations call for S&P 500 earnings growth to rise 1.6 percent in the second quarter from a year ago, while quarterly revenue is forecast to increase 2.9 percent from a year ago, according to Thomson Reuters data.

Dow component Alcoa Inc will post results after the market closes on Monday. JPMorgan Chase & Co and Wells Fargo are also set to report results later in the week.

Second-quarter revenue outlooks for S&P 500 companies - with three negative forecasts for every one that's positive - are among the most negative of the economic recovery, according to Thomson Reuters data.

"We think companies will exceed and beat that low bar. So while Bernanke can always change the conversation, we think the news flow next week should be decent," S&P's Young said.

(Wall St Week Ahead runs every Friday. Questions or comments on this column can be emailed to: ryan.vlastelica(at)thomsonreuters.com)

(Editing by Jan Paschal)

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