LAST week, stocks fell slightly and confirmed the 2015 pattern: going nowhere, fast.
This week could be another herky-jerky road to nowhere unless March employment data erases the emerging picture of a slowing recovery.
Major US indices have not registered two straight sessions of gains in 29 days, the longest such streak since 1931, according to market technician Ryan Detrick, who noted the fact on Twitter, adding: "Wow."
Despite wild swings in both directions, the broad Standard & Poor's (S&P) 500 is almost perfectly flat for the year to date, up 0.1 per cent.
"Up or down? Which one do you want? Just wait a minute, you can have it," said Joe Kinahan, chief derivatives strategist at TD Ameritrade.
Gains cannot stick as well as usual because of the unusually large number of cross currents swirling around the stock market. One data point might hint that growth is slowing; the next that the US is heating up too fast for the Federal Reserve's comfort. One day, the price of oil plunges on a report of a US glut; the next day, oil futures spike because of Middle East unrest. Stocks are unlikely to get into a groove unless the Fed, economic data or oil prices do so first.
Last week, US economic reports were mixed and the reactions to them even more so. Thursday's weekly jobs claims and Tuesday's new home sales were better than expected and the reflex stock market reaction was positive.
But traders assess and reassess everything these days through the prism of the Fed's rate hike schedule. Most traders had interpreted the Fed's March statement as a guarantee that the hike was on hold until after the summer, but comments from officials since have undermined that interpretation. So the housing and employment data prompted traders to buy the US dollar, which benefits from rising interest rates; and to sell stocks, which are hurt as corporate borrowing rates rise.
A stronger US dollar in turn hurts commodities prices as fewer US dollars are needed to buy the same amount of steel in markets that use other currencies. That's one of the reasons behind the bust in raw materials and energy markets. The six-month decline has brought formerly stellar stocks such as Brazilian iron giant Vale and US oil explorer Comstock Resources to their knees. That has caused knock-on effects in the industrial sector where companies such as Caterpillar and Joy Global made much of their money from selling to miners.
The US dollar has retreated somewhat from its highs against the euro, but the appreciation has been significant enough to jeopardise the first-quarter earnings outlook. US dollar pressure is not just on miners and drillers, but also on multinationals who see profits earned overseas dwindle as they translate them into US dollars.
"(Data provider) Factset is calling for a 5 per cent decline in S&P 500 first-quarter earnings largely because of the currency hit to large caps," said Phil Orlando, chief equity strategist at money manager Federated Investors. "I do think the dollar's a headwind here and probably add the sharp oil price decline onto that list as well as another fundamental issue that is disconcerting."
Oil prices shot up briefly last week after Saudi Arabia's unexpected bombardment of rebels in neighbouring Yemen. But the reality of massive stockpiles in the US and the possibility of a rapprochement between the US and Iran soon squashed the rally. Analysts say Iran has millions of barrels of oil in tanks on the Persian Gulf, ready to flood global markets in the event of a deal.
Adding to the confusion, US economic data is no longer uniformly strong. On Wednesday, stocks slid because of a report that factory orders for long-lasting goods declined in February. Losses moderated somewhat in the afternoon, however, as traders saw the silver lining: weak data might keep the Fed on hold.
Friday's employment data could be a decisive factor in the Fed's timing. If the unemployment rate drops much further than its current 5.5 per cent, the central bank could raise rates some time before September - the date most Wall Street analysts anticipate hikes beginning. "Weaker jobs data could lead to falling prices and there's a risk of later lift-off if inflation remains low," said analysts at brokerage Goldman Sachs.
It's been about seven years since the last time the Fed raised interest rates, which has dragged bond rates down to record lows. To find returns, investors have been forced into ever-riskier areas. Last week, St Louis Fed president James Bullard warned this tendency could lead to the formation of asset bubbles.
Indeed, some analysts argue that the "reach for yield" has already created a speculative bubble in the biotechnology niche. Many investors apportioned a small slice of their portfolios to speculate on biotech stocks, tempted by bonanza returns for Intercept Pharmaceuticals and others in recent years.
The Wall Street Journal last week raised the prospect that they had reached irrational, bubble prices. That caused a brief flight out of the sector, only for the speculators to swoop again on Friday.
Barring a jobs data surprise, the stock market is likely to remain unstable as speculators in energy, biotech and other areas rush in and out.
"Our economists recently lowered their 2015 GDP forecast for the US economy, the ISM (Institute for Supply Management) index has declined recently, interest rates and commodity prices are in a downward trend, and earnings revisions are negative and falling," noted analysts at brokerage Barclays, in a research note, warning that economically-sensitive sectors such as industrials are likely to remain weak.