By Wallace Witkowski, MarketWatch
SAN FRANCISCO (MarketWatch) -- For stock investors, the first
quarter was a mild drag as investors played it safe in defensive
sectors. Next week's news, highlighted by the March jobs report,
promises more fireworks.
But for real gains, such as the type that lift benchmarks to new
highs, investors have to get brave again. Cyclicals like industrial
stocks need to outperform defensives, much like they did in
2013.
"If stocks go higher, they're going to have to be on the back of
cyclicals," said Dan Greenhaus, chief global strategist at
BTIG.
Stocks ended Friday with session gains but, except for the blue
chips, losses for the week. The Dow Jones Industrial Average (DJI)
rose 0.1% for the week, while the S&P 500 Index (SPX) shed
0.5%, and the Nasdaq Composite Index (RIXF) suffered its worst
weekly loss since October 2012, dropping 2.8%.
Heading into the end of the first-quarter on Monday, the Dow
industrials are down 1.5% and the Nasdaq is off 0.5%. Only the
S&P 500 is showing a gain, of 0.5% to 1,857.62, about 1% off
its March 7 closing high of 1,878.04. After that anemic
performance, investors are hoping first-quarter malaise was all
about bad weather that garbled economic data.
As a result, investors have taken a defensive posture. The best
performing S&P 500 sectors have been utilities and health-care
stocks with gains of 7.8% and 4.9%, respectively. While telecom
stocks are down 0.9% for the quarter, they've been the best
performers in March with a 4.5% gain.
Within the health-care sector, riskier, high-flying biotechs
like Celgene Corp. (CELG) and Gilead Sciences Inc. (GILD) have been
some of the worst performers among large caps, while more
traditional pharma companies like Eli Lilly & Co. (LLY) and
Merck & Co. (MRK) have been some of the best performers.
In the meantime, the yield on the benchmark 10-year Treasury
note (10_YEAR) has fallen to 2.72% from 3% at the beginning of
January.
Fading business activity and winter weather in the first quarter
snuffed out much of 2013's enthusiasm for stocks, said Mark
Luschini, chief investment strategist at Janney Montgomery Scott.
With falling Treasury yields, investors naturally rotated into more
defensive sectors with interest-rate sensitive stocks.
Jobs data key to markets this week
March jobs data on Friday is going to be the key indicator this
week as both businesses and consumers seek assurance the economy is
improving, especially after previous data was marred by bad winter
weather.
Economists surveyed by MarketWatch expect 200,000 U.S. jobs to
be added for March, and an unemployment rate of 6.6%.
"End of the day, if weather was the problem, [the jobs report]
will provide more of an indication that things are normalizing,"
Greenhaus said. "That is, if [the jobs report's] good."
Even though the Federal Reserve in its last Federal Open market
Committee meeting uncoupled the unemployment rate from acting as a
threshold for future rate hikes, March jobs data on Friday will
still be important because of earnings, Luschini said.
Stock valuations are high, and this year stock prices will be
more reliant on earnings growth than they were in 2013. Luschini
estimates 75% of the rise in stock prices last year was due to
multiple expansion.
"This year it has to be earnings instead of multiple expansion,"
Luschini said. "It has to come from business and consumer
spending."
That in itself may be a headwind at least for the next quarter.
In the past week, expected S&P 500 earnings for the first
quarter contracted to a 0.4% decline, compared with a flat reading
a week ago, and expectations for 4.4% growth at the beginning of
the year, according to John Butters, senior earnings analyst at
FactSet.
Then again, that could be another case of low-balling before
earnings season, which will ramp up in mid-April. Earnings beats
without a corresponding revenue beat, however, won't help stock
prices, as Thomson Reuters pointed out in a recent survey of data
going back to 2008.
Estimated revenue for the first quarter also declined to a
growth rate of 2.7%, down from last week's 3.2% estimate, according
to FactSet.
Auto sales, ECB, ISM also this week
March auto sales data comes out on Tuesday, which will be key to
shares of General Motors Co. (GM.XX), one of the worst large cap
performers on the S&P 500 for the year. Ford Motor Co. (F), on
the other hand, is up a scant 0.1% on the quarter.
Also in the coming week, investors will see if the European
Central Bank adopts some sort of quantitative easing measures to
fight off low inflation.
includes the Chicago PMI on Monday; ISM manufacturing data ,
construction spending on Tuesday; ADP unemployment and factory
orders on Wednesday, and ISM service data, trade deficit, and
weekly jobless claims on Thursday.
Only three S&P 500 companies report earnings this week:
Monsanto Co. (MON) on Wednesday, Micron Technology Inc. (MU) on
Thursday, and CarMax Inc. (KMX) on Friday.
More from MarketWatch:
U.S. stock market is rigged, Michael Lewis says
10 things your real-estate agent won't tell you
Howard Gold: 4 investments you don't want to own
Subscribe to WSJ: http://online.wsj.com?mod=djnwires