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 February's jobs report followed two straight months of payroll
reports that were sharply below expectations, and the rebound
reinforced the theory that the weakness in December and January had
been temporary, related to weather as opposed to worsening
fundamentals.
That bet has helped equities shrug off bearish data and geopolitical
uncertainties in Ukraine, taking the S&P 500 to a series of record
highs. However, it also raised concerns that the market may be
vulnerable to pullbacks on any indication that conditions have
gotten worse.
"We're hoping the payroll report means we're on a stronger footing
going ahead and that we can get more robust growth going forward,"
said Michael Mullaney, chief investment officer of Fiduciary Trust
Co in Boston. "Now we're trading on fundamentals, which we think are
fine. We're comfortable still being long on the market."
In a sign of positive trading momentum, the S&P 500 is 1.3 percent
above its 14-day moving average, a level that could serve as support
in a market decline.
In the latest week, the Dow rose 0.8 percent, the S&P 500 climbed 1
percent and the Nasdaq gained 0.7 percent. While the Dow and the S&P
500 rose for their second straight week of gains, the Nasdaq
advanced for a fifth straight week, up 5.7 percent over that period.
On Friday, the S&P 500 ended at a record high of 1,878.04. The
milestone marked its fifth record closing high in the past seven
sessions.
Wall Street has marched steadily higher this year, save for a
pullback in late January that came on concerns about emerging
markets. Those worries will remain prominent after Russian President
Vladimir Putin rebuffed a warning from U.S. President Barack Obama
over Moscow's military intervention in Ukraine's Crimea region.
Obama has ordered sanctions against Russia in the most serious
confrontation since the Cold War.
"Weekends are notorious for geopolitical developments, so we might
be vulnerable to some kind of shock," said Terry DuFrene, investment
specialist at JPMorgan Private Bank in New Orleans, which has $977
billion in assets under management.
Macro issues may have a large influence on trading next week, with
little else that could serve as catalysts. Only two S&P 500
components, Urban Outfitters <URBN.O> and Dollar General <DG.N>, are
scheduled to report quarterly results. Economic indicators on tap
include February retail sales, seen rising 0.2 percent, and a
preliminary read on March consumer sentiment from the Thomson
Reuters/University of Michigan Surveys of Consumers, which is
expected to hold flat from February.
While any development in Ukraine could overshadow the data, the
conflict is not expected to drastically change the market's
fundamentals.
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"We're not as susceptible to a disruption from that part of the
globe as we would be to a flare-up in the Middle East," DuFrene
said. "That gives us some breathing room, and though there will be
fears of contagion, the market should be able to continue taking
things in stride."
FAVORING LARGE-CAP STOCKS
Equities in total may be hard-pressed to post dramatic gains from
record levels, but analysts see opportunity in specific areas of the
market.
Fiduciary Trust's Mullaney, who oversees about $11.3 billion in
assets, said he was overweight large-cap stocks and underweight
small-caps, which outperformed the S&P 500 for the past two years,
as well as so far in 2014.
"While multinationals with a lot of emerging market exposure could
be hit by developments in Ukraine, we don't think the pain will be
that outsized, compared to other parts of the market, and in the
meantime, small-caps are not favored by their valuation."
The forward price-to-earnings ratio of the small-cap S&P 600 <.SPCY>
is 20.1, while the Russell 2000's <.TOY>, which includes more small
names, is 24.5. To compare, the S&P 100 <.OEXA>, which has a higher
concentration of large-cap names, has a P/E ratio of 14.3, while the
benchmark S&P 500's is 15.8.
Morgan Stanley analysts wrote that it had been "dismissive" of the
idea that emerging market contagion would impact U.S. equities, "as
what really matters is that the dream of growth is still alive,"
with corporate earnings not slowing.
"In this environment," the firm added in a note to clients, "stock
pickers would benefit from exposure to technology as its historical
alpha ranks first over all other sectors."
Sunday will mark the five-year anniversary of the closing low that
the S&P 500 reached during the financial crisis. The benchmark index
has soared almost 180 percent from that level.
(Editing by Nick Zieminski and Jan Paschal)
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