The S&P 500 index churned below the key 1850 line but eventually pushed through to put a respectable gain in the books last week. Fed chief Janet Yellen’s free-of-surprises testimony, a discounting of some weather concerns, and better-than-expected retail sales and earnings proved enough to deliver the S&P 500 to a fresh record.
But where from here?
The buzz going into the first week of a new month would typically be reserved for the venerable employment report, the typically market-moving marquee report. This week might be a little different. Jobs data are important no doubt, especially with two bum reports over the last couple of months. But the unstable Ukrainian situation (Russia’s pledge to use force and the U.S. response) is likely to overshadow the payrolls data at least early in the week. During geopolitical uncertainty, which can prove disruptive to global trade (in this case, crude and other natural resources), investors generally dive into relatively lower-risk investments. That sentiment may limit the stock market’s upside.
Watch VIX
One measure to keep an eye on during the Ukrainian uncertainty is the Chicago Board Options Exchange (CBOE) Volatility Index. It’s back in the mid-teens after a spike to 21.48 a month ago (figure 1). The VIX, known as the market’s “fear gauge,” has remained relatively subdued. In fact, it remained little moved on some higher stock days (all-time highs, remember?) that would typically drive VIX lower. Can it really hold this low as investors grapple with the Ukrainian situation? Let’s see.
Important to note, trading volumes in the CBOE VIX pit have fallen sharply as well, so it’s possible we haven’t gotten a true reading of sentiment. February 3 set a single-day record when 2.4 million options traded on the volatility index. Last week drew very light volume. On Thursday, for instance, only 318,000 contracts traded.
True Reading?
No matter what unfolds around the globe, Friday will eventually roll around and at least in the short term, the jobs number will matter. Weather has been an important variable late in 2013 and early in 2014 and has clouded the economic picture, including hiring and firing. Even Yellen admitted to lawmakers that the true economic impact of this winter’s extreme mix of cold and snow is difficult to measure. If the recent deterioration in the data is more than weather related, the Federal Reserve might be a bit more reluctant to cut back on stimulus. Indeed, Janet Yellen told the Senate last week that monthly asset purchases (or the reduction in purchases already set in motion) are not on a preset course.
Only 75,000 jobs were added in the final month of 2013 and 113,000 for January. Both numbers fell well short of expectations. Industry economists look for about 140,000 new jobs last month in the government’s report. Let’s see if there are any meaningful revisions to the soggy readings throughout the winter. In the lead-up to the Friday release, ADP will offer a first peek at February trends in the jobs market when it releases a report on private-sector payrolls Wednesday morning. Weekly jobless claims out on Thursday will likely take on added importance as well.
Costco Next in Line
Among stocks to watch this week, two components of the Dow Jones Industrial Average host meetings. Caterpillar (CAT) has its annual meeting on Tuesday and Exxon Mobile (XOM) on Wednesday. Honeywell (HON), BP (BP) and Anadarko Petroleum (APC) are also hosting investor events this week. On the earnings front, retailers, including Costco (COST), always a good measure of U.S. consumer spending, plus Kroger (KR), and Staples (SPLS), report on Thursday.
With the Q4 earnings reporting season winding down, however, stock news might take a backseat to geopolitical worries and economic data. Friday’s numbers are possibly the next key catalyst that could dictate if stock optimism is indeed justified. After all, the Federal Reserve is remaining data dependent and many investors may be too.
Good trading,
JJ
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