US stocks were more or less flat last week as economic data was a little too hot and earnings a little too cold for investors' tastes.
Midweek, the major indexes came within 2 per cent of their all-time highs, and stocks could close that gap this week, as long as there is no change in tone from the Federal Reserve and some change in tone from corporate earnings.
What was hot last week? New weekly jobless claims fell to the lowest level since the 1950s, suggesting that companies are simply not laying off people. The labour market is still thawing out from the Great Recession, and millions of Americans unemployed because they have either given up looking for work or are too old or infirm to return to the work force. But people already in the work force are enjoying the largest measure of job security in generations. That makes it extremely unlikely that the US economy is shrinking again, as some economists had feared would happen this year.
"It's pretty clear the worst-case scenario is not going to play out so there's reason to be happy about that," said Oliver Pursche, chief executive of broker dealer Bruderman Brothers, explaining an abrupt turnaround in major indexes, which have risen almost 15 per cent from their February lows. "There's a sigh of relief."
The jobs market is hot, but a little too hot for investors' comfort. That's because the Federal Reserve may now be more inclined to raise interest rates.
At its meeting on Wednesday, the Fed is almost certain to keep rates unchanged, judging by comments from Janet Yellen and other Fed officials in recent weeks about their consciousness of market disruptions in China and elsewhere.
"While there appears to be little chance of a rate hike at this meeting, the wording of the statement will be key in forecasting whether or not the Fed is setting the stage for a move in June," said Quincy Krosby, market strategist at Prudential Financial.
The Dow Jones Industrial Average closed last week at 18,000, a milestone it first crossed in December of 2014. It's a conundrum: daily moves in US stocks during the last 18 months have been as big as almost any period in the last 20 years. On longer term charts, major indexes are going nowhere, fast.
One of the reasons is that "fast money" keeps jumping from one sector to another. Hedge funds and other traders shift from one sector to another based on moves that track the shifting perceptions of the Fed's plans. First, the financial sector led as the central bank hinted that rate hikes were on their way. While the financials were rising, however, sectors negatively affected by rates, such as telecoms and utilities, were falling, and the two forces cancelled each other out at the index level. Then, when Ms Yellen hinted she was postponing hikes until global markets settled down, the sectors swapped places and banks lost ground in the first quarter while utilities and telecoms rallied. After the jobs data, the trend reverted back to that in place in late 2015. Treasury rates rose again as markets foreshadowed a return to rate hikes in June.
If jobs are hot, earnings are not, or at least not hot enough for investors.
Last week's earnings parade was Wall Street's upside-down logic at its finest. Companies like energy-industry supplier General Electric, gold miner Newmont Mining, and emissions-scandal plagued Volkswagen were expected to report massive slowdowns so the stock market rewarded them for not slowing down as massively as anticipated.
Netflix, Google's parent Alphabet, Intel and Microsoft, in contrast, reported rapid earnings growth. And yet their reports were met with an ice-cold response. Netflix had long reported super-charged overseas subscriber growth that it could not quite emulate this time out. Google's online advertising revenue retained its growth momentum but costs in more experimental businesses were high. And Intel warned it would lay off thousands of workers as it attempts a bold reinvention of the company once synonymous with personal-computer chips. Intel's partner Microsoft is already in the midst of a similar effort. Enthusiasm about the software giant's relatively small but rapidly growing "cloud computing" business wore off.
Materials companies and banks are thriving on the stock market because of low expectations, but tech companies bear the curse of great expectations.
This week will be another crowded earnings calendar, led by Apple, the world's largest company by market capitalisation. A whole industry has grown up around the iPhone, with chip makers like Britain's ARM Holdings and app developers like Uber employing tens of thousands of people worldwide. Now, however, it appears that almost everyone in the world has an iPhone and is very happy with it. That may be good for Apple's reputation, but it means that sales growth is harder to come by.
In other words, earnings disappointments in the tech sector could continue. One brokerage warns that such disappointments bode ill for the stock market for the balance of the year.
"The multiple on earnings has fattened up a lot in the last two months, but we don't think the outlook for earnings has really changed very much," said analysts at brokerage Morgan Stanley, in a research note. "Given the broader context of the 'binge' since the February lows, our advice is to be a bit more cautious on meaningful US equity market appreciation from here."