By Wallace Witkowski, MarketWatch
SAN FRANCISCO (MarketWatch) -- Investors this week will look at
what the Federal Reserve used as a trigger to taper its asset
purchases, and whether jobs data back that decision, while focusing
more on company fundamentals as earnings season ramps up.
The week ahead will also see more traders return from holiday
vacations, so volume is expected to get a sizable boost. Since
Christmas, average daily volume for stocks has been 25% or more
below the fourth-quarter average for 2013, according to
Barclays.
The Dow Jones Industrial Average (DJI), the S&P 500 Index
(SPX), and the Nasdaq Composite Index (RIXF)all finished slightly
lower last week, after all three hit their highs for 2013 on Dec.
31. The New Year's Eve surge capped the best year for the S&P
500 and Dow average since the 1990's. The last leg of that rally
came after the Fed finally made the move that had obsessed
financial markets for the past year: It said it would start
reducing asset purchases in January. Whether investors felt the
tapering was slight ($10 billion) or because the Fed stressed it
was committed to keep rates low, stocks kept on their rally hats.
The S&P 500 rose by about 4% before year end following the Dec.
18 Fed decision.
Investors will get a better sense of what drove outgoing Fed
Chairman Ben Bernanke and his colleagues to make that move when
they read minutes from the Federal Open Market Committee's December
meeting on Wednesday afternoon. Stocks got a preview of the Fed's
influence on Friday as they drew back on remarks from Philadelphia
Fed President Charles Plosser that the central bank may have to get
"aggressive" in raising rates only to regain some lost ground after
Bernanke defended the policy of near-zero rates that kept the
economy afloat.
"The Plosser comments were refreshing," said Mark Luschini,
chief investment strategist at Janney Montgomery Scott. "Too many
people think unwinding a $4 trillion balance sheet will be as
smooth as silk."
Investors want to know the details of what prompted the Fed to
go from delaying an expected September tapering -- leading to
expectations that it would happen sometime in March -- to pulling
the trigger in December, Luschini said. Aside from the FOMC
minutes, the biggest focus for the week will be jobs data, he
added.
December jobs data and the unemployment rate on Friday will be
crucial in supporting the Fed's decision to start lightening up on
bond purchases, said Dan Greenhaus, chief global strategist at
BTIG.
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"What jobs will do is reinforce the decision," Greenhaus said.
"If they don't, that would certainly be annoying: You'd like to see
a strong number reinforce the Fed decision."
A consensus of economists surveyed by MarketWatch expects the
addition of 190,000 jobs in December with the unemployment rate
holding steady at 7.0%.
Show me the revenue, not the earnings
A trickle of company earnings will set the stage for the
fourth-quarter earnings dump that happens mid-January.
"While next week is not the biggest week, the conversation
changes back to company fundamentals," said BTIG's Greenhaus.
Alcoa Inc. (AA), once the blue chip that ushered in the start to
earnings season, reports quarterly results after the bell Thursday.
Also of note will be results from Micron Technology Inc. (MU) on
Tuesday. It was one of the best-performing large-cap stocks in
2013, surging 243%.
Earnings from S&P 500 companies are expected to have risen
6.3% in the fourth quarter. That's slower than the 9.3% growth
analysts expected, on average, on Sept. 30, said John Butters,
senior earnings analyst at FactSet.
Revenue, which has recently become a more closely watched metric
than earnings, is expected to grow by a scant 0.3%, compared with
0.9% growth expected at the beginning of the quarter.
Other earnings reports expected this week include Monsanto
Co.(MON) , Bed Bath & Beyond Inc. (BBY) , and Constellation
Brands Inc. (STZ) on Wednesday; and Family Dollar Stores Inc. (FDO)
on Thursday.
Companies have been issuing profit warnings in droves, although
that may have more to do with executives seeking to set the bar low
than a change in corporate fortunes. Of the 107 companies on the
S&P 500 that issued an outlook for the fourth quarter, 94 of
them, or 88%, issued earnings guidance that fell below Wall Street
estimates, according to FactSet's Butters.
Revenue is going to remain a big focus, Luschini said, seeing
that profits have been boosted through corporate cost-cutting and
share buybacks.
Share buybacks from S&P 500 companies reached their highest
levels since the fourth quarter of 2007, rising to $128.2 billion
in the third quarter of 2013, according to S&P Dow Jones
Indices.
"Just keeping up with the current bull market means that
companies have to pay 25% more for the same number of shares they
repurchased last year," said Howard Silverblatt, senior index
analyst at S&P Dow Jones Indices, in a recent note. "However,
we are starting to see excess buying, where the repurchases
outnumber the issuance, and therefore reduce the share count. The
lower share count leads to higher EPS, and the market likes higher
EPS."
Squeezing higher earnings out of dwindling revenue has been a
game Corporate America has been playing all throughout the
recovery, and that's raising the stakes for companies to start
showing investors that their fundamentals are solid and that their
stock price isn't predicated on cheap money.
With the S&P 500 rising nearly 10% over the fourth quarter
alone, investors want to be rewarded in the form of better guidance
coming out of companies, Greenhaus said.
Greenhaus reiterated that share buybacks are still being fueled
by the Fed's lower interest rates. The lower rates make it more
attractive for a company to borrow more to finance buybacks, and,
in turn, boost its stock price. When those rates start to rise
again, it will have a crucial effect on buybacks, making underlying
company fundamentals all the more important, Greenhaus said.
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