Don't expect any fireworks on Wall Street in the coming week. Not until Friday, anyway.
Barring any major earnings warnings, strategists say stocks should drift quietly higher in a truncated holiday week, buoyed by optimism over the
Federal Reserve's latest rate cut and some signs of strength in recent economic data, and inspired by the winding down of earnings confession season.
While some volatility could spill over into Monday's session from the annual rebalancing of the small-cap
Russell 2000 index, official after the close of trading Friday, trading volume will most likely be thin and quiet in the first half of the week. The stock market closes at 1 p.m. Tuesday and stays closed through Wednesday for the Independence Day holiday. Meanwhile, trading desks will likely be thinly staffed Monday and Tuesday morning, as Wall Street tends to take long weekends during shortened summer weeks.
But Friday could bring some surprises. The June
jobs report, one of the best gauges of the overall health of the economy, will be released Friday morning. And second-quarter earnings season blasts off that day, with a report from aluminum giant and
-- the leader of the pack in earnings season.
This past Wednesday's sixth interest-rate cut this year inspired some optimism that an economic recovery is indeed on its way. After cutting rates by a half-point five times this year, the Fed dropped the
federal funds lending target by just a quarter-point to 3.75% last week and indicated that it may be winding down its rate-cutting program.
"The Fed cut of 25 basis points brings confidence back to the market," said Barry Hyman, chief investment strategist at
Ehrenkrantz King Nussbaum
. "It's an indication that the Fed sees the economy stabilizing."
Some economic data released last week also inspired confidence in the economy. The
Chicago Purchasing Managers' Index, released Friday, rose to 44.4 in June from 38.7 in May, well above expectations and the highest reading since December. May
durable goods orders also came in much stronger than expected. And consumer confidence data from the
University of Michigan
rose despite continued rounds of layoffs in the past month. Together, the data could hint at a bottoming-out in the economy.
But confession season is also ending this week, and Hyman thinks a pattern set in the past two quarters, where investors sold stocks during confession season only to buy them back once earnings season began, could repeat itself this time around. Confession season is a roughly month-long period pre-earnings season when companies let Wall Street know if they expect to miss their performance targets. It has yielded a lot of bad news in the past couple of quarters, sending investors into a selling spree. But stocks have rallied at the end of confession season over the past two quarters as investors bet the worst of the slowdown was behind them.
Hyman predicts that stocks will move higher, led by tech, through early August, lifting as high as 11,200 on the Dow, 2450 on the
Nasdaq and 1300 on the
S&P 500. But after that stocks could come right back down, he says, if data aren't pointing to an economic recovery.
Michael Lyons was also encouraged by the 25 basis-point rate cut, and by a five-day rally on the Nasdaq. "We could see stocks drift up. Tech is acting very well here and we got a nice follow-through on Friday," he said.
Still, strategists remain chary. While sentiment seems to have improved, plenty of risks remain. Some of the good cheer on the Nasdaq in the past week was due to end-of-quarter window dressing. All week long, portfolio managers have been dressing up their portfolios to present to shareholders in anticipation of the end of the quarter Friday.
And while the market has likely already heard most of the negative earnings warnings it's going to hear for the second quarter during the past four weeks of confession season, there's always room for
more. Traders have been worried for weeks that
will lower their performance targets. They haven't yet, but it could still happen.
Most importantly, if the employment report shows greater-than-expected weakness, recently revived hopes for economic recovery could be dashed. While economists are expecting the data to show continued weakness, any degree of weakness out of the ordinary could induce selling Friday. Economists and investors are now betting on a pickup in the economy in the third or fourth quarter of this year.
"If the rate of decline in payrolls were to intensify; if the types of jobs disappearing broadened, if temporary jobs continued to go down, if the work week fell, or if unemployment rose more than a couple of tenths of a percent -- these kinds of things would be classified as worrisome," said Josh Feinman, chief economist at
Deutsche Asset Management Americas
"But if nonfarm payrolls decline by 25,000-50,000, it wouldn't alter anybody's outlook," he said.
That could make for some excitement at the end of the week.