updated 4/2/2006 4:25:23 PM ET 2006-04-02T20:25:23

The first quarter of 2006 was a great one for stock investors. Wall Street did in those three months what it failed to do for all of 2005 — post solid returns in nearly every sector.

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So how do you top that? The better question is whether it will be possible.

Wall Street is facing an economic conundrum. The economic figures seen in the first quarter were, taken as a whole, stronger than expected. While many investors expected a continued slowdown in growth, our economy continues to churn forward quite nicely. For the average American, this is a great thing.

For a Wall Street investor, it means more interest rate hikes from the Federal Reserve. Increasing employment and continued spending raises inflation risk, which prompts the Fed to make capital more expensive to slow economic growth. Wall Street’s fear, however, is that the Fed goes too far — possibly making the upcoming economic slowdown an economic crash.

So, with reports on job creation and other key economic data due in the week ahead, investors will be rooting for fewer jobs and slower growth in the hope that the Fed will stop and the economy will continue to chug along slowly, but surely.

Last week, the Fed’s latest rate hike and unchanging stance on economic growth led investors to re-evaluate their holdings, dumping rate-sensitive large-cap industrials for smaller companies and tech firms. For the week, the Dow Jones industrials fell 1.51 percent and the Standard & Poor’s 500 index lost 0.62 percent, while the tech-focused Nasdaq composite index jumped 1.17 percent.

Economic data
The Labor Department’s jobs creation report, due Friday, often sets the tone for weeks of trading, especially with Wall Street highly sensitive to economic growth issues. Economists expect 198,000 jobs created in March, down from 243,000 in February.

Investors could become nervous if, like last month, the jobs number comes in higher than expected — that could give the Fed even more reason to raise rates if policy-makers felt more workers could equate to higher demand.

In other economic data expected this week, the Institute for Supply Management will release its manufacturing index on Monday, followed by its services index on Wednesday. The manufacturing index, which measures industrial activity, is expected to rise to 57.7 in March from a February reading of 56.7. The service sector index, however, is expected to drop to 59 from February’s 60.1 reading.

Finally, housing stocks could see increased activity after the Commerce Department’s construction spending report. Spending was expected to rise 0.5 percent in February, up from January’s 0.2 percent increase.

Earnings season
With first-quarter earnings season not due to truly begin until the third week of April, only a handful of companies are reporting results this week, and few qualify as serious market movers. The retail sector could see some movement as Rite Aid Corp., Pathmark Stores Inc. and Bed, Bath & Beyond Inc. report this week, but none of these companies is big enough to prompt a major shift.

Farm and garden manufacturer Monsanto Co., due to report earnings Wednesday morning, offers an interesting look at a company with business in both the industrial and consumer sectors. The stock has performed well over the past year, rising 52.7 percent from its 52-week low of $55.51 on April 15, 2005, to close Friday at $84.75. Monsanto is expected to earn $1.51 per share, up from $1.38 per share a year ago.

Events
Monday is the start of the second quarter of 2006, and it’s reasonable to expect some increased volatility as major institutional investors, especially mutual funds, begin to make moves that they feel will boost returns over the next three months. It might be enlightening to see which sectors see heavy volume over the next few days — it could be a clue as to what Wall Street’s major money managers are thinking.

In addition, the first trading days of April will also bring monthly sales reports from both retailers and automakers.

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