Data to Help Show Recovery’s Course
Economic news and corporate earnings reports due out this week may help reveal whether the U.S. economic recovery is still on track--or whether the U.S. is headed for a dreaded “double dip” recession, which could send stocks into another swoon.
Having watched stocks sink at the end of last week under the weight of several downbeat economic reports, investors will be keeping a close eye on reports measuring the strength of the nation’s service sector, inflation at the wholesale level and worker productivity, as well as earnings reports from such high-profile companies as Cisco Systems Inc. and Procter & Gamble Co.
“The post-bubble weakness is worse than people thought. It’s obviously not a one-quarter blip,” said Stephen Roach, chief economist at Morgan Stanley in New York. “We’re right on the brink of a double-dip recession. GDP growth slowed dramatically in the second quarter, and a slew of other numbers suggest that momentum is moving sharply to the downside.”
After rallying 14% from its multiyear low reached July 23, the blue-chip Standard & Poor’s 500 index shed a combined 5% on Thursday and Friday amid various disappointing U.S. economic reports, including the latest manufacturing, gross domestic product and employment data.
At 864.24, the S&P; 500 is not far from its five-year low of 797.70. The technology-oriented Nasdaq composite index, at 1,247.92, is even closer to its multiyear trough of 1,229.05.
Stocks sold off sharply in June and July as a succession of corporate scandals panicked investors. Stocks reversed course and started rallying July 24 as arrests in the Adelphia Communications Corp. scandal and President Bush’s approval of landmark corporate reform legislation signaled that progress was being made on the executive ethics front, analysts said.
“In my view, we have undoubtedly passed the worst point in the corporate accounting scandals,” said Jack Laporte, manager of the T. Rowe Price New Horizons fund. “The pendulum is already swinging in the other direction, and companies are likely to err on the side of conservatism as many of the recent perpetrators of fraud face criminal convictions.”
But in recent days, investors have shifted their attention from corporate scandals to the uncertain state of the economic recovery, in turn bidding stocks lower.
Noting the troubling data, two major investment banks predicted Friday that the Federal Reserve will cut interest rates this year in another attempt to perk up the flagging recovery, according to a Reuters survey.
A double-dip recession could deal a psychological jolt to investors--all the more reason investors will be keeping a close eye on the raft of economic data and corporate earnings reports due out this week.
If the economy slips back into recession in the next few months, “disappointment will replace doubt,” which might mean another sharp drop for the stock market, Donald Straszheim, president of Santa Monica-based Straszheim Global Advisors, said in a report Friday.
Straszheim still expects a slow, choppy recovery, but he said investors should keep an eye on consumer data, including retail sales, big-ticket spending, confidence and any hints of weakness in housing prices.
Gary Thayer, chief economist at A.G. Edwards & Sons Inc. in St. Louis, said key economic updates this week include this morning’s report on non-manufacturing production in July, Thursday’s release of monthly sales figures from chains such as Wal-Mart Stores Inc. and Friday’s preliminary tally of second-quarter productivity. Also coming is the producer price index for July, which measures wholesale inflation and is due out Thursday.
On Aug. 13, the morning of the Fed’s next meeting, July retail sales figures will be issued. Thayer expects them to be strong, offering “additional confirmation that confidence is down but the economy is rolling along.”
But with investors on edge, the various numbers themselves “are not as significant as how the market takes them,” Thayer said.
Companies expected to issue quarterly earnings reports this week, according to Bloomberg News, include consumer products giant P&G; this morning; tech bellwether Cisco and insurer Conseco Inc. on Tuesday and insurance company Loews Corp. on Thursday. As the last major tech company to report, Cisco’s numbers and second-half outlook will be closely watched, analysts said.
Though any positive surprises could help spark another stock rally, skeptical economists say the economic recovery may be further off and far less potent than many investors expect.
“An asset bubble burst in the U.S., which is something we haven’t seen since the 1920s,” Morgan Stanley’s Roach said. “Now it’s payback time, and it’s going to be a fairly lengthy payback. We’re probably only one-third or, at best, one-half, through the post-bubble aftershock.”
