Economic data may be key for a December stock rally
Wall Street’s newfound confidence that interest rates are headed lower may not be enough to fuel a December rally if the economy looks like it’s weakening.
This week’s reports on the job market and retail sales, along with readings on the manufacturing and service sectors, will be key in determining how well the economy is weathering a housing market that most experts predict will keep deteriorating well into the new year.
The stock market heads into the final weeks of 2007 having posted a 3.0% rise in the Dow Jones industrial average last week, a 2.8% gain in the Standard & Poor’s 500 index and a 2.5% advance in the Nasdaq composite index.
It was the best weekly point gain for the Dow -- the blue chips rose nearly 391 points -- in more than four years. The advance was driven by hints of an upcoming rate cut from Federal Reserve officials and news that Citigroup Inc., Freddie Mac and E-Trade Financial Corp. were able to raise cash to offset some of their debt.
But the positive week nonetheless capped the blue-chip index’s most negative month in five years. Financial companies still face billions of dollars in write-downs in the fourth quarter. And although oil prices have retreated from record highs, the dollar remains weak against rivals including the euro, the pound and the Canadian dollar -- a trend some argue shows that rates should stay put.
Even if the Fed eases rates at its Dec. 11 meeting, such cuts can only go so far in boosting a flagging economy. Last week, Goldman Sachs upped the chances of a recession to between 40% and 45%, while current and former government officials offered dreary economic outlooks.
Fed Chairman Ben S. Bernanke said in a speech last Thursday at the Charlotte Chamber of Commerce in North Carolina that fourth-quarter gross domestic product was slowing “significantly” in the fourth quarter, despite having grown 4.9% in the third quarter.
A day earlier, Fed Vice Chairman Donald Kohn said housing was deteriorating at a “very, very rapid” rate, and that “I don’t think we have seen the bottom.”
And former Treasury Secretary Lawrence Summers, in a speech Thursday to bankers at an American Banker/Source-Media event, said it would be unprecedented, considering what the economy faces, for expansion to continue. “It is quite clear that the substantial majority of foreclosures that will take place in this wave have not yet taken place,” he said.
Although Treasury Secretary Henry M. Paulson Jr. has been meeting with mortgage industry officials and regulators about possibly keeping low initial loan rates from resetting at much higher levels, signs point to a very shaky economy in 2008.
For stocks to rally this month, investors will want evidence that consumers are still spending.
Major retailers, including Wal-Mart Stores Inc. and Target Corp., release November sales figures Thursday, which should shine more light on how strong holiday shopping will be.
Data have suggested respectable post-Thanksgiving sales, but investors are concerned that shoppers will be hesitant due to still-lofty gasoline prices and sinking home prices.
Wall Street is also worried that sales have been decent only because prices have been sharply discounted, which is good for consumers but bad for companies’ profits.
Consumer spending relies heavily on employment, so Wall Street will also be closely eyeing, as always, the Labor Department’s monthly jobs report.
On Friday, economists surveyed by Thomson/IFR expect the report to show November payrolls rose solidly, but by a smaller amount than in October, and that the unemployment rate ticked up to 4.8% from 4.7%.
Also this week, the Institute for Supply Management releases its indexes on manufacturing and service sector activity. Economists anticipate that growth in both areas in November was slower than in October.
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At a glance
Today
Automakers release their sales figures for November.
Treasury bill auction.
The Institute for Supply Management issues its report on activity in the manufacturing economy for November.
Tuesday
The Senate Health Committee holds a hearing on developing a comprehensive response to food safety.
The Senate investigations subcommittee holds a hearing on unfair credit card interest rate increases.
Wednesday
The Labor Department issues revised reports on productivity and costs for the third quarter of 2007.
Commerce Department reports on factory orders for October.
The Institute for Supply Management issues its report on activity in the non-manufacturing economy for November.
Thursday
The nation’s largest retailers announce their sales figures for November.
Labor Department reports on weekly jobless claims.
Freddie Mac reports on mortgage rates.
Quarterly earnings report due from Toll Bros.
Friday
Labor Department reports on employment for November.
Federal Reserve reports on consumer credit for October.
