Investors need to make a decision in the coming days: Should they trust Federal Reserve Chairman Ben S. Bernanke's encouraging words about the future or give in to worries about weak consumer spending?
Bernanke's declaration Friday that the economy was on the verge of recovery sent Wall Street surging and Treasury prices falling as investors poured money into stocks. The major indexes set new highs for 2009.
But investors have extremely short attention spans. A new economic report or a comment on the economy from a company or government official drives trading, and reports from just a day or two earlier seem to be forgotten.
That's what happened two weeks ago, when reassuring words from the Fed were quickly canceled by downbeat reports about consumers. Stocks fell sharply and Treasury prices rose as investors sought safety.
There could be a repeat this week as investors, worried about whether consumers are going to spend enough to power a recovery, get a pair of readings on consumer sentiment.
"Any consumer data in the short run, whether up or down, will affect the market," said Frank Ingarra Jr., co-portfolio manager at Hennessy Funds.
On Tuesday, the Conference Board releases its monthly consumer confidence index. Economists polled by Thomson Reuters, on average, forecast a modest gain in the index to 48 for August from last month's 46.6.
The reading has fallen for two consecutive months, which is a concern for investors because consumer spending accounts for more than two-thirds of economic activity. The July index was an unpleasant surprise, coming in weaker than analysts expected.
Although the index is expected to rebound somewhat in August, it would take a reading above 90 to signal that the economy is on solid footing. That's not likely to happen for some time because consumers are still worried about losing their jobs as layoffs continue.
On Friday, Reuters and the University of Michigan will release their final report on consumer sentiment during August. The preliminary report released Aug. 14 was significantly worse than expected and sparked a big stock sell-off.
If investors are able to hold on to their optimism that followed Bernanke's remarks, they might be able to withstand still-shaky readings on consumers. But the market's recent pattern also raises the question: For how long? It's very likely that some economic or earnings report will unnerve the markets again.
Traders sent stocks sharply lower last Monday as they worried about consumer spending, and the major market indexes fell about 2%. By the end of the week, Bernanke's assessment of the economy and some better-than-expected existing-home sales had the major indexes surging more than 1.5%.
"The market says, 'What do you have for me today?' and reacts," said Jordan Smyth, a managing director at Edgemoor Investment Advisors.
For the week, the Dow Jones industrial average jumped 2%, while the Standard & Poor's 500 index gained 2.2% and the Nasdaq composite index rose 1.8%.
Investors' intense scrutiny of individual economic reports, of course, is nothing new. That is how the market has found its direction over the years. Now, though, they are still trying to determine when a recovery will begin and how strong it will be.
"We aren't far enough along to determine whether businesses have reached equilibrium and will move forward or fall further," said Doug Lockwood, chief investment officer at Cornerstone Wealth Management.
In between the consumer confidence reports, investors will get the Commerce Department's data on July durable goods orders, which measure orders to U.S. factories for big-ticket manufactured goods.
Economists believe that durable goods orders increased 1.7% last month from June, when orders plunged 2.5%, their worst showing in five months. A rebound could again propel the market higher and be seen as a sign that the economy is healing.
Smyth said that report provided an accurate outlook for potential future growth of businesses, making it a crucial piece of data.
Despite the choppy trading lately, investors have been pleased by the economic data -- after all, the reports have fed Wall Street's five-month rally. At first, they were buying on news that the economy's decline was slowing. Now, Smyth said, the market is rising as "we're starting to move toward actual good news."
At a glance
Conference Board releases the consumer confidence index for August.
Standard & Poor's/Case- Shiller index of home prices for June and the second quarter is released.
Federal Housing Finance Agency releases June home price index.
Quarterly earnings reports due from Borders Group, Burger King Holdings, Medtronic and Staples.
Commerce Department reports on July sales of durable goods and new homes.
Commerce Department releases second-quarter gross domestic product figures.
Labor Department releases weekly jobless benefit claims.
Freddie Mac releases weekly mortgage rates.
Commerce Department reports on personal income and spending for July.
Quarterly earnings report due from Tiffany.