U.S. stocks may run into some turbulence this week as the impending release of bank stress test results, a Federal Reserve meeting and a flood of earnings give investors reasons for caution.
Fears of a global swine flu pandemic developed into another factor to watch over the weekend with new infections in the United States and Canada discovered on Sunday, and as millions of Mexicans hid indoors to avoid a virus that has already killed up to 81 people.
But investors said that as this point, news on the state of the financial system and earnings would drive sentiment and that information about the illness was too sparse to influence the New York open on Monday. News of the flu spreading, however, could weigh on the market as the week progresses.
While investors have been heartened by a recent flurry of surprisingly upbeat earnings and economic data, strategists said there was still concern about whether the government has done enough to shore up the banking sector.
Besides fretting about bank stress tests, investors will deal with a raft of economic indicators this week. The data menu includes February home prices, April consumer confidence, weekly jobless claims and an advance report on first-quarter real Gross Domestic Product.
The Federal Reserve will be in the spotlight as the central bank's policy-making panel is set to hold a two-day meeting beginning on Tuesday. The policy statement is scheduled for release at 2:15 p.m. on Wednesday.
People are looking for positive news out of the stress tests, saying that the banking system is now OK, said Doug Roberts, chief investment strategist at ChannelCapitalResearch.com in Shrewsbury, New Jersey. I think there could be some rockiness this week.
DOWN AND OUT IN BEVERLY HILLS
Stabilizing the banking sector is seen as one of many crucial steps to get the economy on the road to recovery.
So far this year, federal regulators have closed 29 banks, including four that failed on Friday night, plus one credit union. First Bank of Beverly Hills, in Calabasas, California, was one of the four shuttered banks; it had $1.5 billion in assets and just $1 billion in deposits.
Piles of bad loans, many made to subprime borrowers during the housing boom, have forced some banks into insolvency after the credit crisis began in the summer of 2007. Banks' balance sheets deteriorated with the sharp slowdown in the housing market as mortgage delinquencies and foreclosures soared along with unemployment.
Worries about the banking sector's health helped push the market to 12-year closing lows on March 9. Since then, the benchmark Standard & Poor's 500 <.SPX> has gained 28 percent.
Last week, the Dow Jones industrial average <.DJI> fell 0.7 percent and the S&P 500 shed 0.4 percent, causing both to break a six-week winning streak. In contrast, the Nasdaq <.IXIC> rose 1.3 percent and scored its straight weekly advance, rising 1.3 percent.
The Obama administration is due to publicly release the bank stress test results on May 4, a week from Monday. But there are fears that some of the news could start trickling out this week, which raises the specter of more volatility in the stock market.
One thing investors should expect right now is at least further volatility in the financial sector until the stress test results come out on May 4, said Michael Sheldon, chief market strategist at RDM Financial in Westport, Connecticut.
We're very likely to see a pickup in rumors as we get closer to that May 4 announcement of where all the banks stand in terms of the stress tests.
Further reports on the swine flu could also begin to influence investor sentiment. While the only deaths so far have been in Mexico, the flu is spreading with 20 cases in the United States and four in Canada, and possible infections also popped up as far afield as Europe and New Zealand.
It does have the potential to have headline implications for the market next week, said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey.
EXXON, P&G AND VISA EARNINGS ON TAP
The earnings calendar is full of economic bellwethers, including five Dow components: Exxon Mobil Corp
According to Thomson Reuters data, about 35 percent of the S&P 500 companies had reported quarterly results through Friday. The aggregate forecast is for first-quarter earnings to decline 35.3 percent from a year earlier.
Expectations have been so low and companies have been doing a very good job on the cost side, so while revenues are light across the board, as expected, earnings have been OK. And the outlooks, while cautious, have been favorable, said David Katz, chief investment officer at Matrix Asset Advisors in New York.
Other household names due to post results this week are media and entertainment conglomerate Viacom
Also set to command attention are any developments surrounding the beleaguered U.S. auto sector. Chrysler faces a deadline on Thursday, April 30, to reach deals to cut its debt and labor costs, as well as cement an alliance with Italy's Fiat SpA, to satisfy the Obama administration.
Chrysler has been operating under $4 billion of emergency U.S. government loans; it must complete those agreements to maintain its funding and receive more. Without additional support, Chrysler may liquidate.
GDP, CHICAGO PMI AND CONSUMER DATA
Standouts on this week's economic calendar include the release of the S&P/Case-Shiller home price index for February on Tuesday, along with the Conference Board's April consumer confidence index.
The government's advance reading on first-quarter real GDP is set for release on Wednesday, the same day as the Fed's statement on monetary policy. GDP is a measure of all goods and services produced within U.S. borders.
The advance reading of first-quarter GDP is expected to show the pace of economic contraction slowed to a 5 percent annual rate from 6.3 percent in the fourth quarter, according to a Reuters poll of 69 economists.
Among Thursday's data highlights will be reports on weekly jobless claims, data on March personal income and spending, the first-quarter employment cost index and a report from the Chicago purchasing managers on April manufacturing activity in the U.S. Midwest.
On Friday, investors will get the final April consumer sentiment reading from the Reuters/University of Michigan surveys. Reuters forecast: 61.9 versus 57.3 previously.
(Wall St Week Ahead runs weekly. Questions or comments on this one can be e-mailed to: ellis.mnyandu(at)thomsonreuters.com)
(Reporting by Ellis Mnyandu; Additional reporting by Leah Schnurr and Edward Krudy; Editing by Jan Paschal and Diane Craft)