The path to a continued robust rally is a lot weaker this week no doubt because of the slow jobs report that we heard on Friday. Many investors have been whispering about and waiting for a market correction in this long rally we've had and if the present rally is going to continue it's going to have to look to earnings as the catalyst to keep it going.
Healthcare adding 15.2% and utilities adding 11.8% the first quarter of this year led growth and the S&P 500. These particular sectors are less affected by a short-term slowdown in consumer spending, which may have been on minds of investors due to higher payroll taxes this year.
In my personal opinion, earnings may be the key to a continued slowdown, not a continued bullish run. This week we have JPMorgan Chase & Co (JPM) and Wells Fargo (WFC) coming in on Friday. Of particular interest will be Wells Fargo because it is so heavy into mortgages, it could give us a clue on how healthy the housing markets are. This in turn will tell us how healthy the market as a whole is since real estate often drives the economy. Expectations are about two-thirds lower than they were a year ago at this time so negative outlooks have dominated the pre-earnings season. The economy, even though it has been inching forward at a snail's pace, is still not performing very well so companies are giving weaker guidance. Recent quarters have seen the majority of revenue beats so common sense would tell you sales are increasing - but this is not the case. So I think as we go into this season investors are going to be looking at earnings, maybe even more than revenue by itself because of the weak economic quarter that has been experienced the first period of 2013.
With minutes from the March after MOC meeting coming out Wednesday, I believe investors are looking for a sign. Is the central bank in the U.S. going to give hints of a slowdown in its bond purchasing program? Friday's job report might put a dent on that. I don't believe we are going to expect much from the economic calendar this week that would be different from last week. Retailers are expected to post a 1.9% rise in sales in March but a year ago it was 2.9% so a rosy economic outlook does not seem like it's going to take place this week as compared to last week.
In fact, if my observations are correct, "fiscal tightening" could wreak more havoc on the markets as it begins. For this reason we may see worsening news as labor demand weakens down the road. Our first glimpse of this will take place on Tuesday, April 8, when the National Federation of Small Business jobs survey reports. Yes if it does not come out favorably there is a good possibility that it will be a preemptive warning about troubles in the labor market ahead.
How can the unemployment rate fall to 7.6% from 7.7% if all this bad news is coming out? Job creation is still rising but the stamina for growth appears to be waning--momentum is still with job creation. Things don't just suddenly hit a brick wall and stop, they tend to slow down.
Be aware of this as you trade and watch the markets move. We've been on a long upward trend now but it looks like the news is telling us that a robust first quarter is now going to move aside for a second quarter that's going to be dominated by fiscal headwinds reflecting slower growth because of slower demand for goods and services. I would expect the markets to level off, possibly move sideways for a season, and then correct themselves before a continued to move up later in the year.