Few indicators to prod markets are on horizon
The stock market has lost some of its swagger, and it seems unlikely to regain it any time soon.
A six-month rally that sent Wall Street’s major indexes up more than 45% from their March lows has hit the wall. Whereas months ago investors welcomed even modest signs that the economy had slowed its decline, now traders won’t settle for anything less than signs of actual growth before they’ll buy stocks with any enthusiasm again.
“There’s no catalyst to push the market higher right now,” said Brett D’Arcy, chief investment officer at CBIZ Wealth Management Group in San Diego. “You can only be less bad for so long before you need to be good.”
The holiday-shortened week -- the market is closed for Labor Day -- brings few major economic indicators that could revive the rally. The biggest reports will probably be the Federal Reserve’s “beige book” report, which tracks economic activity by region, and the University of Michigan’s preliminary report on consumer sentiment during September.
However, those reports are not considered as important as monthly jobs data, which came out Friday, or retail sales and consumer spending reports.
An improvement in employment and consumer spending is needed for a full recovery, but there’s no sign yet of that happening, said Mike Rubino, chief executive of Rubino Financial Group in Troy, Mich. “We think numbers can get worse,” Rubino said about job losses. “We’re still going to leak jobs.”
On Friday, the Labor Department said the unemployment rate rose to a higher-than-expected 9.7% in August from 9.4% in July. There was some upbeat news: U.S. employers cut fewer jobs than expected, shedding a net 216,000 positions during the month.
Stocks rallied in light pre-holiday trading after the report was released, with the Dow Jones industrials rising almost 97 points. But that blip up wasn’t enough to offset a big drop earlier in the week that came on resurgent worries about the economy and fears that investors had been too optimistic in bidding stocks up this spring and summer. The Dow and Standard & Poor’s 500 indexes fell more than 1% last week, while the Nasdaq composite index slipped 0.5%.
The concern across financial markets is that consumers, even if they have jobs, will continue to curb their spending out of fear that they will be laid off. And they’re not likely to spend with any vigor until they see a more stable job market.
“We definitely need to see jobs improve to see consumers spend,” said Ingrid Hendershot, president of Hendershot Investments in Bristow, Va. “With unemployment continuing to rise, a recovery will be anemic.”
Investors will get some insight into the consumer’s psyche this week from the Reuters/University of Michigan preliminary consumer sentiment index for September. The news isn’t expected to be good; economists expect a slight drop in the index to 65.3 from 65.7, according to Thomson Reuters. Last month when the preliminary report was released, the market tumbled sharply.
In the absence of new data showing solid growth in spending and a rebound in jobs, the market probably won’t move much higher, analysts say. It’s unclear whether the market will settle into a narrow range ahead of earnings reports next month -- the next potential major catalyst for the market -- or start to track backward.
Terence Burns, president of Campion Wealth Management in Vienna, Va., said a 5% to 10% drop wouldn’t be surprising as investors try to balance stock prices with potential earnings growth moving out of the recession. The market “overreacted on the downside, then overreacted on the upside,” he said. “There’s an ebb and flow to find the right valuation.”
CBIZ Wealth Management Group’s D’Arcy is more optimistic, believing the market will stay relatively flat during the coming weeks because “there’s plenty of money to protect against any big declines.”
Enough cash remains on the sidelines, and investors’ tolerance for risk has returned enough that any major drop in the market will probably be met with buying, especially because investors do believe a recovery is coming. It’s just that no one is expecting much strength when the rebound finally occurs.
Other reports this week include the Labor Department’s weekly tally of unemployment claims, to be released Thursday, and the Commerce Department’s data on July wholesale inventories Friday.
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At a glance
TODAY
Labor Day: Financial markets are closed.
TUESDAY
Federal Reserve releases a report on consumer credit for July.
Quarterly earnings report is due from Smithfield Foods.
WEDNESDAY
Federal Reserve releases its “beige book” report on regional economic conditions.
President Obama gives a prime-time speech on healthcare to Congress.
House Judiciary subcommittee hearing on the role of the lending industry in the home foreclosure crisis.
THURSDAY
Labor Department releases weekly jobless claims report.
Commerce Department releases a report on international trade for July.
Senate Homeland Security and Governmental Affairs Committee hearing on stimulus spending.
House Judiciary Committee hearing on digital books.
FRIDAY
Commerce Department reports on wholesale trade inventories for July.
Treasury Department releases a status report on the federal budget for August.
Quarterly earnings report is due from Campbell Soup.
