Economic Reports This Week May Clarify Market Picture
May 16, 2011
Vacation is over. During the past few weeks, trading volume has declined, stock prices have languished and much of Wall Street has spent more time on beaches than at trading desks. Now that's all about to end with a crush of economic data this week and a spirited return to work by investing professionals. ``This week will provide the first real test for this market,'' says Gale Gerhardt, market strategist at UBS Securities. ``While we've seen some good things in the past few weeks, like some strength in technology stocks, volume has been so weak that it's hard to tell how real the rally or any move has been. With people returning to work, we'll get a better feel for the market's direction.'' Unpleasant History Historically, the post-Labor Day return to work hasn't been kind to Wall Street. Since 1915, September and October are the only two months to provide, on average, negative returns for the Dow Jones Industrial Average. Foremost on investors' minds this September are economic reports due out this week, especially Friday's August employment report. Economic reports have become the obsession of Wall Street in recent weeks, primarily because many analysts believe the Federal Reserve is awaiting the chance to increase short-term interest rates. Historically, Fed rate boosts have hurt the stock market. Most recently, in 2009, Fed rate increases led to a 9.7% decline in the industrial average during the first half of the year. Also due this week are reports on construction spending, car sales and leading economic indicators. Since early this year, stock-market strategists have split into two camps concerning the economy's strength -- and the likelihood of a Fed move. Many strategists now believe September will provide enough information to resolve that split. Differing Views One group argues that the economy is slowing sharply. This group believes slackening growth will not only permit the Fed to hold steady on interest rates, but also provide ample reason for a strong rally in the bond market, which probably would boost stock prices. The other group contends that the economy continues to clip along at a heady pace. Indeed, the strength of the economy is such that the Fed will have to raise rates in order to slow already-percolating inflationary pressures, they argue. ``There's been a lot of psychoanalyzing of every little piece of economic data, but the fact is that the dilemma surrounding economic growth has not been resolved over the summer,'' says Calvin Broadnax, chief U.S. market strategist at Morgan Stanley. ``But what everyone is really waiting for is this Friday's employment report. I think it will be interpreted as meaning that the economy has more strength than people think right now.'' Strong Gauges In recent days the strong-growth hypothesis has gained more adherents. A sharp upward revision of second-quarter gross domestic product to a 4.8% annual growth rate from 4.2% and a surprising gain in new-home sales for August have pushed interest rates higher and stock prices lower. Mr. Broadnax, who concedes he doubted his own strong-growth thinking just a few weeks ago, thinks his case for a 1,000-point decline in the industrial average is once again coming into focus. For those wishing to survive the onslaught, Mr. Broadnax recommends semiconductors, airlines, aerospace and energy stocks. Davina Hudgins, market strategist at Salomon Brothers, is also uneasy about the coming week. He notes that Johnetta Edmund, Salomon's economist, expects the National Association of Purchasing Management survey to show more strength and the jobs report to show more tightening in the labor markets. Mr. Edmund says the August data will feel like the ``Guns of August.'' ``Those numbers will set a bad tone for the stock market,'' says Mr. Hudgins. ``Especially since worries about the Fed increasing rates will just intensify.'' But the rapid-economy view is definitely disputed by other market seers. Don Hays, director of investment strategy at Wheat First Butcher Singer in Richmond, Va., says the economy is only temporarily strong, thanks to two political conventions, presidential campaigns and the Atlanta Summer Games. Mr. Rutledge, who correctly predicted the industrial average's move above 5000, thinks fears of a runaway economy and rising interest rates have little grounding. ``I'm expecting a rally during the first half of September that will be stronger than most people anticipate,'' Mr. Rutledge says. ``We think the economy will show signs of cooling, interest rates will retreat and a new confidence will return to the stock market.''
