Investors' attention will focus on Fed

L.A. Times Archives

Sept. 21, 2009 12 AM PT

Associated Press

If the stock market’s seemingly unstoppable march higher is to be believed, the economy is firmly on the road to recovery. Several key events on the economic calendar this week may help determine whether that conviction holds up.

Federal Reserve Chairman Ben S. Bernanke’s prediction last week that the worst of the recession is “likely over” helped sustain the markets’ gains, which brought the Standard & Poor’s 500 index up 2.5% through Friday.

This week, the market will get to see what the rest of the Federal Reserve board’s key committee thinks when a two-day meeting is held to decide whether to keep interest rates at their historically low levels of close to zero.

The Fed will have to raise interest rates eventually to keep inflation in check, but when that will happen is one of the hottest topics among investors and economists.

It’s widely expected that the Fed will keep rates steady at its upcoming meeting, but the statement accompanying the decision will be heavily scrutinized to determine how strong the committee believes the economy is recovering and when that rate change may come.

If Bernanke and other Fed officials continue to preach low interest rates for the foreseeable future to help prod the economy toward recovery, that should provide support for stocks and Treasury bonds.

Bond traders have been concerned about the potential for inflation eating into yields on government debt.

Any signals from the Fed that interest rates might need to be raised in the near future to combat inflation could spook investors and help push the markets lower. Investors will also get reports this week on home sales, durable goods orders and leading economic indicators.

Good news on consumer sentiment, the housing market and industrial production have provided enough encouragement in recent weeks to keep the market churning higher. However, some kind of pullback, even a modest one, at some point is considered normal.

Whether that drop comes this week is still up for debate.

With major market indicators up more than 50% over the last six months, the conventional wisdom on Wall Street is that the market is due for a pullback.

What’s not known is what might trigger it, how big it could be or how long it could last. Or whether it will even happen.

“Maybe we’ve come back too much, but what’s the catalyst to send it back down?” said Gerry Sullivan, chief investment officer at Claremont Investment Partners in Summit, N.J.

Maury Fertig, chief investment officer at Relative Value Partners in Northbrook, Ill., said a decline of at least 2% in major indexes this week could be possible as investors take some profits off the table.

Then again, “nothing would surprise me at this point,” Fertig said.

The Dow Jones industrial average rose 2.2% last week, while the Nasdaq composite index jumped 2.5%.

The S&P; has skyrocketed 58% since its bottom in early March, while the Dow is up 50%. The Nasdaq has surged 68% during that time.

The housing market will also be in focus this week.

The National Assn. of Realtors releases a report on home resales Thursday, and the Commerce Department reports new-home sales Friday.

Economists polled by Thomson Reuters predict that home resales rose to 5.3 million on an annualized basis in August, slightly up from July and the fifth straight month of increases.

New-home sales are predicted to increase for the fifth straight month to an annualized rate of 450,000 in August, up from 433,000 a month earlier.

Sales of new homes are up more than 30% from their bottom in January.

Investors have already seen some encouraging data on the long troubled housing sector and are clearly hoping for more.

A report last week from the Commerce Department showed housing starts increased 1.5% in August to their highest level in nine months amid a jump in apartment building.

Building permit applications, an indicator of future activity, increased 2.7%.

However, the report showed the market was still far from solid as construction of single-family homes declined for the first time in six months.

This week, investors will also get a private research group’s take on leading market indicators.

If the Conference Board’s index of leading indicators, a gauge of future economic activity, rises again in August it would be the fifth straight month of advances and the latest encouraging sign that the economy was pointing higher.

The Commerce Department is expected to report Friday that orders for durable goods -- those designed to last more than three years, such as home appliances -- increased for the fourth time in five months.

Economists are expecting a 1.1% rise in August after a 4.9% increase in July.

(BEGIN TEXT OF INFOBOX)

At a glance

TODAY

Conference Board releases its index of leading indicators for August.

Treasury auction will be held.

Quarterly earnings results expected from Lennar.

TUESDAY

Federal Housing Finance Agency releases July home price index.

Federal Reserve Open Market Committee meets to review interest rates.

Quarterly earnings results expected from CarMax, Carnival and ConAgra Foods.

WEDNESDAY