Next week is going to be loaded with economic data. Here are my thoughts on the market and what will be important things to look at next week.
- The market indexes are at new highs of the year and at this time there is no sign of weakness in the trend. The strength has mainly been driven by strong earnings and relative rise in asset values due to the weakness in the dollar. The dollar weakness was reinforced by the Fed press conference where the Fed made it clear that they are in no hurry to tighten monetary policy.
- Earnings performance has been pretty remarkable as majority of the companies continue to beat earnings estimates. Corporate profit margins are very elevated. I have a very hard time believing that this kind of performance on the margin front can continue for too long. Margins are generally mean reverting over long periods of time. I think earnings growth is going to slow down going forward as it will be hard to grow margins, so profit growth at best will follow revenue growth and it is hard to grow revenue at a double digit pace after the initial phase of an expansion. There was also an article in Barrons which made a good point that as companies have increased capital expenditures recently you will get a head wind from depreciation on profit margins.
- I am expecting a weak May as I think the risks on the macro front are increasing due to rising oil prices and the end of QE2 at the end of June. Although this was not part of my original analysis but the recent rise in unemployment claims is not a good sign either. I think as we get done with earnings, the market will focus on macro and we may get a sell off. Having said that, the market is in a strong uptrend and these kind of up trends can keep going on till they break. So I am definitely not adding short positions till I see a break in the uptrend. It is also possible that investors are much more confident about the economic recovery this year and the the end of QE2 will not be a big concern to them, so we could keep going higher.
The main economic reports to look at next week will be
- ISM Manufacturing survey on Monday at 10AM ET. This survey has been on fire over the last few months. The survey measures improvements over the last month so I think there is a possibility of a disappointment as it is hard to continue such strong month over month improvements
- ISM non-manufacturing survey on Wednesday 10AM ET. This survey has not been as strong as manufacturing but it is more important from an economic perspective as services make a up a large portion of the economy
- Weekly unemployment claims – The weekly unemployment claims are gaining more importance as they have started to weaken. If they again weaken this week then it will be a pretty strong indication that the jobs market is loosing momentum
- The non-farm employment report at 08:30 ET. This will be biggest economic report of the week. The consensus is 185K. I think anything below 175K will be a disappointment as I think at this stage of the expansion the momentum in jobs should be picking up if we are going to get a good recovery.