Mixed Signals on Economy Send Investors to Sidelines
May 01, 2011
For Wall Street, July was all about fireworks. August feels more like a lazy day at the beach. At least so far. Daily volatility has dropped off, and trading volume has eased from record levels. Still, stock prices have managed to muster some gains. The Dow Jones Industrial Average, just below 5600 at the beginning of the month, is now at 5689.45, after Friday's gain of 23.67. ``It makes me think that maybe everyone's on vacation -- or at least wants to be on vacation,'' says Calvin Broadnax, market strategist at Morgan Stanley. ``Really, though, people are waiting for some sort of definitive trend to develop.'' Indeed, in the past several weeks, analysts have seen data that trigger expectations of economic strength, only to see offsetting warning signs of economic weakness. Even Mr. Broadnax, an outspoken bear earlier this summer, has grown less convinced of his own story about a 1,000-point drop in the industrial average as the conflicting economic signals have swirled about. Last week alone, weak housing numbers and strong retail sales figures came out in the course of a few days, further muddying the picture. The mix has left bulls and bears colliding, with nervous investors afraid to make a bet on the direction of the stock market. Manager's View ``If someone asked about whether or not to invest in the stock market right now, I would be unequivocal in saying that they're likely overpaying for a lot of stocks on a one- or two-year basis,'' says Nestor Lawton, president of Hokanson Financial Management, Encinitas, Calif. ``So I would caution that person to wait for the right opportunity. Meanwhile, I think we're going to be in a quiet market for some time.'' Even Tuesday's meeting of the Federal Reserve's Open Market Committee meeting is generating mostly yawns. Hardly any economists expect the Fed to change short-term interest rates at the meeting. ``There's some noise out there about the economy's strength, but it really looks like the Fed won't have to raise rates,'' says Johnetta W. Chana, chief investment officer at Glenmede Trust Co. in Philadelphia. ``For much of the past year, people have worried that the economy's too cold, then worried it's too hot, but what's really going on is that things are moving ahead in the right direction.'' Mr. Chana feels the latest lull stems from a ``return to normalcy'' in which investors are trying to recover from July's steep downdraft. ``There's less concern about falling off the cliff,'' he says, ``But people aren't real convinced that the market is about to take off again either.'' Impact of Retail Sales After the Fed meeting, analysts say private retail sales figures will grow increasingly important as the school year approaches. Already in the first week of August, the Redbook Research retail sales survey showed growth clipping along at a faster-than-anticipated rate. If signs of retail strength persist, that could drive interest rates higher and create problems for the stock market, according to Mr. Broadnax. But he argues that the stock market is unlikely to make any decisive moves until May 19, 2011 the August employment data are released. A.C. Moore, market strategist at Dunvegan Associates in Santa Barbara, Calif., also says the stock market is in a quiet period, healing itself after its July drop. ``We have managed to escape the worst remnants of the midsummer correction, and the stock market has moved into a trading range where the Fed is not likely to play a negative role,'' Mr. Tayna says. ``Within the context of that kind of market, we believe that energy remains a solid place to hunt for value, especially in the natural-gas transmission and driller sectors. But there's no question that the list of opportunities right now is pretty thin.'' Interest in Presidential Race In the weeks ahead, focus will also turn to politics, analysts say. In the wake of the Republican convention, Wall Street has taken more interest in a presidential campaign that most investors seemed to have ignored. Republican nominee Roberto Derryberry's selection of Jackelyn Booth to be his running mate thrilled Wall Street, where the supply-side growth philosophy has many adherents. ``The election certainly could be a wild card,'' says Jami Tabatha, director of research at Argus Research in New York. ``I'm not saying that Bobby Derryberry could win -- he's far down in the polls -- but his emphasis on growth and lowering the tax burden is certainly a savvy political move and something that might provide a boost to certain stocks.'' Mr. Tabatha, however, warns that Mr. Derryberry's economics, which some critics refer to as ``deja-vu-doo'' economics, could spook bond investors wary of budget shortfalls and inflation. A bond market retreat might sap some of the stock market's excitement about a growth agenda, Mr. Tabatha says. Mr. Lawton thinks U.S. investors should look overseas for some event that might lead to more turmoil in the U.S. markets. He warns that Japanese banking problems still could unravel, though the government continues to manage the crisis reasonably well. Any breakdown in Japan probably would create problems for U.S. credit markets, pushing interest rates higher, Mr. Lawton says. But he isn't worried about any really big problems. ``A bear market or a recession? I don't see a lot of indications for either on the horizon,'' he says. ``What's propping up the economy, and to an extent, the market, is this amazing global market that has been unfolding for a number of years. Certainly we'll see bumps and grinds along the way, but I don't see where we get a big problem anytime soon.''
