The market has been engaged in a balancing act for six weeks now between being made optimistic by 1st quarter earnings that are mostly beating Wall Street's estimates, and concerns about 1st quarter economic reports that are consistently worse than forecasts and indicate the economic recovery is stumbling again.
As a result, while the market gets high marks for its resilience and ability to shrug off the negative economic reports, it has also made almost no further progress over the last six weeks. The Dow closed yesterday (Thursday) just 1.1% higher than six weeks ago on March 14. The broad NYSE Composite closed Thursday just 0.7% higher than on March 14. Even the usually more volatile Nasdaq closed at 3,258 on March 14 and just 0.9% higher on Thursday. Meanwhile, the DJ Transportation Average and Russell 2000 are 3% and 2% below their levels of six weeks ago.
With the first quarter earnings reporting period pretty much winding down next week, the market will soon not have that distraction impeding its normal focus on economic reports.
And next week will be one of the most intense weeks for reports in some time. More importantly, they will include updates of some of the most troubling reports of the last two months.
For instance, the Conference Board's Consumer Confidence Index for April will be released on Tuesday. Its last reading was a significant negative surprise, showing a decline from 68.0 in February to 59.7 in March. The market will want to see that reversed, as it has an impact on retail sales, which have also disappointed in recent reports.
The Chicago PMI will be released on Tuesday, the ISM Mfg Index on Wednesday, and the ISM non-mfg Index (services sector) on Friday. The last reports of all three were significant negative surprises.
A number of lesser but still important reports including Pending Home Sales, the Case-Shiller Home Prices Index, Auto Sales, Construction Spending, Factory Orders, the U.S. Trade Deficit, and U.S. Productivity will also be released.
The most important of all will likely be an updated look at the employment situation.
The ADP Employment Report, compiling the number of new jobs created in the private sector in April will be released on Wednesday. The Labor Department's monthly jobs report, which includes both private sector and government jobs, will be released on Friday.
The Labor Department's employment report a month ago was a significant negative surprise, reporting that only 88,000 jobs were created in March versus the consensus forecast for 200,000.
Next week's large schedule of reports would be important in any event, but will be especially so given today's report that GDP growth in the first quarter fell short of forecasts, coming in at 2.5% versus the consensus forecast of 3.3%. Further, much of the reported growth was the result of a build-up of corporate inventories. Analysts would rather see production going out as sales rather than into inventory. Removing the inventory build-up from the reported numbers, the real growth rate was an even more anemic 1.5%.
Meanwhile, the GDP report was the first estimate of first quarter economic growth, and will be subject to revisions in each of the next two months as more data becomes available.
The problem is that with the negative surprises in economic reports for February and March, those GDP revisions are quite likely to be to the downside.
So next week's already important economic reports take on even more significance.
Will they show sharp positive reversals indicating the slowdown in February and March reports were temporary glitches due to weather or some such? Or will they provide still more evidence that the economy is stumbling again this year as it has in each of the last three years?
Since the economic stumbles in each of the last three years resulted in corrections in the S&P 500 of 16.3% in 2010, 20.4% in 2011, and 10.7% last year, all beginning about this time in the spring, investors would be well advised to remain cautious until next week's economic reports are released and the market's reaction can be seen.
The market's sideways action of the last six weeks is quite likely to end in one direction or the other next week.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.