Stocks could carry the momentum of this latest rally into next week as investors await Friday’s jobs report.
All three major indices made big gains last week, each topping 6%. Both the S&P 500 and the Nasdaq Composite snapped a seven-week losing streak, while the Dow Jones Industrial Average had been eight weeks.
“I think this is the start of that long-awaited relief rally,” said Sam Stovall, chief investment strategist at CFRA Research.
In the next four-day week, there are only a handful of gains, with reports from Salesforce.com, Hewlett Packard Enterprise and online pet retailer Chewy.
Friday’s May employment report is the most important data in a calendar that also includes ISM manufacturing, job openings data, monthly vehicle sales and the Fed’s beige book, all on Wednesday.
“I think the consensus of 325,000 [nonfarm payrolls] number, we could easily beat. But it’s just math,” said Alex Chaloff, co-head of investment strategies at Bernstein Private Wealth Management. He noted that there could be positive revisions to the previous month’s data, as there have been in recent reports.
Economists had expected the pace of job creation to slow from 428,000 jobs in April. “You can’t keep growing at that kind of rate, especially with Covid on the rise. That’s quite a bit of air coverage for the 325,000 number,” Chaloff said.
A recovery after the Fed minutes
Stocks in the last week were choppy but rose sharply, especially after the Federal Reserve released the minutes of its latest meeting.
The S&P 500 gained 6.5% to 4,158, the best week since November 2020. The Dow was up 6.2%, while the Nasdaq was the best, up 6.8%.
“He was waiting for some kind of catalyst, and I think he got it from the Fed. Not only was he not more aggressive, he said he would look to speed up rate tightening,” Stovall said.
“So I think a lot of investors thought they were getting ahead of the rate hike cycle, which implies they could end up pausing in the third quarter at some point,” he added. “I think that’s what triggered the rally. The market was just oversold on a breadth and sentiment outlook and was ripe for some kind of good news and the Fed delivered.”
Chaloff said the market expects the Federal Reserve to raise interest rates by 50 basis points, or half a percentage point, at each of its next two meetings. That could mean choppy trading during that period, but he added that the first time the Fed returns to a quarter-point rate of increase, the market should rebound strongly.
“I think this is the early stage of a rebound, but we have a Fed meeting in June. We have a Fed meeting in July,” he said. “It will have an impact on the markets. There will be nervousness when the Fed recognizes that it has work to do. We are not saying that this is the bottom… But it is great to see that the markets react appropriately to strong macro data.”
For now, though, stocks could go higher. “I would say it hasn’t been a very volume week, so it’s good, it’s fun, it’s great to start the long weekend, start the summer with some force, but the breadth and depth hasn’t been there. Chaloff said. “I want to say ‘Okay, everybody, we’re not dancing. We’re not there yet’… We think we’re past the worst, but not all of it.”
looking for catalysts
Chaloff said he will be watching to see if hedge funds, which had been offloading positions, start buying in the coming week, a possible positive catalyst for the market.
“These kinds of weeks like this help build on themselves, so while it’s not a breakthrough week, it’s an important week,” he said.
Any developments over the weekend could be important, but the weekends are also a time when investors reflect. “If you have a really bad week and people can’t touch their money for 48 or 72 hours, you really have a bad opening to start the week,” Chaloff said.
Bond yields in the last week were lower and more stable. The 10-year yield was at around 2.74% on Friday.
“I think it’s positive for stocks and obviously for bonds,” Chaloff said. “After seven or eight weeks of exits, there are starting to be inflows into fixed income instruments of all kinds, and that keeps yields restrained.”
That’s also a positive for growth companies that were hit the hardest by rising interest rates.
Markets close for the month of May on Tuesday. As of Friday, the Dow and S&P 500 were flat for the month, but negative for the Nasdaq.
Stovall said June is typically a positive for the S&P 500. “June generally has few fades. It’s lackluster in terms of performance,” he said.
week ahead calendar
memorial day holiday
Profits: Salesforce.com, HP, Ambarella, Victoria’s Secret, ChargePoint
9:00 am S&P/Case-Shiller Home Prices
9:00 am FHFA Home Prices
9:45 a.m. Chicago PMI
10:00 a.m. Consumer Confidence
Profits: Chewy, Hewlett Packard Enterprises, Michael Kors, Capri Holdings, PVH, Pure Storage
Monthly vehicle sales.
9:45 a.m. Manufacturing PMI
10:00 a.m. Manufacturing ISM
10:00 a.m. Construction expenses
10:00 a.m. SHAKE
2:00 pm Beige Book
Profits: Broadcom, Ciena, Hormel Foods, Asana, CrowdStrike, PagerDuty, Cooper Cos, Okta
8:15 am ADP Payroll Data
8:30 am Unemployment Claims
8:30 am Productivity and costs
10:00 a.m. Factory Orders
8:30 a.m. Employment
9:45 PMI services
10:00 ISM Services